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Prescription vs practice

18th of 6, 2014
By Tirthankar  Mukherjee

Prescriptive prudence usually has no chance when pitted against political expediency. Some populism is inherent in democratic practice – after all the whole business is of, by, and for the people, we are told – and even if expediency is bad, there is no guarantee that the untried prescription would have been actually better. There are too many imponderables in public affairs, and a country’s best laid plans go awry following developments over which it had no control. Still, one feels that in Mongolia, political decisions have sometimes trumped economic sense contained in advice from those whose business it is to warn and advise.    

I thought of these things as I recently read a summary of the World Bank’s latest policy note on Mozambique, entitled ‘Generating Wealth from Mozambique’s Natural Resource Boom’. Not merely on the map, but in the mind, too – at least since the end of the compulsion to take the Soviet world view -- Mozambique is a long way from Mongolia. Thus, I do not suppose the African nation rings too many bells among our policy makers here, with their rightful concern-bordering-on obsession with their two neighbours and selective dalliance with the delightfully identified third neighbours. However, I could not help thinking how Mongolia could have done much better if it had treated similar World Bank warnings about and to it less cavalierly.

The report forecasts that government revenues from Mozambique’s coal and gas sectors could be $9 billion by 2032, which would represent 7% of the country’s gross domestic product and 21% of total government revenues. At the same time it gives Mozambique tips on how to avoid a later ‘painful bust’ that is cyclically inevitable after a minerals boom. Doesn’t it sound familiar to any follower of how things have unfolded in Mongolia? But a word before I write more about the report on Mozambique, in the hope that readers will recognise possible parallels here.

Last month’s column contained some uncharitable, but I hope not unfair, remarks about the World Bank and thus it may sound anomalous that this month I should speak highly of a report from it. The explanation is that no matter what the quarrel may be with the course of action suggested, or even coerced, by international financial institutions, there is no denying that both their data collection and methodology of writing reports show great professional competence. Their regular reports on the Mongolian economy bear abundant evidence of that skill.

The report on Mozambique says the coming boom in the country’s extractive industries “could dramatically reduce poverty in the medium term and help to establish the foundation for sustainable growth and shared prosperity. As in many other resource-rich countries, it will be challenging to manage natural resources and maximise the benefits for Mozambique. Effectively utilising resource wealth poses complex challenges for macroeconomic and fiscal policy. Commodity prices are very volatile. Excessive public expenditure growth may also affect short-term macroeconomic stability. High-value resource exports may also cause an appreciation of the real exchange rate, damaging the price competitiveness of non-resource industries.”

We know this here, don’t we?


The report then cautions, “The actual value of resource revenues by 2032 is highly unpredictable,” and surmises that because of this the possible range for these revenues may range between $4 billion and $17 billion. This means that the “total annual resource envelop” would be between $36 billion and $50 billion. “These revenues will likely be subject to significant volatility and unless measures are taken to address it, this volatility will be transmitted to the Budget.”

The note points out those mineral resources are, by definition, finite and that spending the revenues obtained from them on consumption rather than on physical infrastructure or human capital development will mean that sustainable income increases will not happen. Moreover, spending such finite revenues on consumption could require “difficult fiscal adjustments” later.

So, what should the mandarins in Maputo, the capital of Mozambique, do to avoid these problems and generate permanent wealth for the country and people as a whole? I give below some of the many recommendations made in the World Bank policy note.

Key, it points out, to converting resources wealth into long-term growth and development is good quality government, integrity of public institutions and transparency in the management of public finances. Only a consensus on the national resource policy can help curb and manage popular expectations and only government transparency and accountability can facilitate this consensus. A top priority should be improving administrative capability, in public investment management, for example.

We were told this here also, weren’t we?

On the fiscal front, policy should allow the “frontloading” of public development investment while ensuring sustainability. Fiscal targets (particularly an expenditure-growth target and a non-resource primary balance target) should be used to both fulfil the fiscal framework’s objectives and to measure the progress made towards them. “A fiscal rule could help to keep the growth of an already large public sector in line with its administrative capacity, while a resource fund would insulate the Budget against the volatility of resource revenues and allow a portion of present revenues to be reserved for future spending.”

Revenues from natural resources that surpass the government’s spending capacity could be saved in a resource fund. “Mozambique should consider adopting a comprehensive sovereign asset and liability management policy that includes both public assets and government’s (implicit and explicit) liabilities.”

On the other hand, government’s consideration of establishing a national development bank is a matter that “should be treated with a great deal of caution given the risks involved”. In countries with less developed capital markets, “the international experience underscores a number of important risks arising from nonperforming loans and from these institutions’ typically limited ability to gauge creditworthiness and low capability to collect on loans of execute collateral.”

There does seem to be nothing new under the sun, doesn’t it?

So if all these things were said before in Mongolia, how and why did things go wrong? Of course, politicians will have their compulsions and elections are usually won on the basis of long-term ornate rhetoric and short-term bankable sops. World Bank economists write reports, post them online, and feel happy at a job well done; politicians with an eye on the next polling season take imprudent measures for their constituents’ immediate gratification, and feel happy at an election won.
 
It should not surprise anybody that these reports are rarely heeded and their recommendations resisted or ignored. Actually, heeding presupposes acquaintance with the contents and that presupposes careful study. But a report called “Which World Bank Reports are Widely Read?” has found that nearly one-third of the PDFs on the Bank’s website were never accessed. Incidentally, and curiously, the Bank’s “bestseller” was Vietnam Development Report 2009: Capital Matters, with 2955 downloads. Getting busy people to do professional background reading is difficult. And, with no offence to anybody, it is understandable that reading detailed research papers with complex arguments, often in a language that is not their native tongue, may not be easy for decision makers.

Writing the report is only the first step. The World Bank does it, and mostly does it well. The follow-up, a long process of advocating policy change, is for Mongolians, in government or in civil society, to take up, once they are convinced of the seriousness or merits of the warning. But for that again, they have to read the reports, think about them, debate them and so on.

All easier prescribed than followed. 
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