Fool's Gold: Assessing the Performance of Alternative Fiscal Instruments During the Commodities Boom and the Global Crisis

Abstract
An assessment of special fiscal instruments (SFIs)—such as resource funds and fiscal rules—during the recent commodity cycle shows that they have generally failed to provide an enabling framework for long-term economic diversification and sustainable development in developing resource rich countries. While resource rich countries' fiscal policy has been more conservative during the recent boom, the link between this moderation and the existence of SFIs in the country appears tenuous. Resource funds and rules have only helped guide fiscal policy in countries with an established history of sound fiscal policy and high-quality institutions. The paper argues that the focus of existing fiscal instruments on saving resource windfall abroad undermines financing for local development and hinders economic diversification. The lessons from a handful of country successes emphasize the need for development-oriented fiscal instruments. The design of fiscal instruments in resource-dependent countries needs to recognize commodity price volatility as the most pressing fiscal challenge for these countries while the accumulation of wealth for future generations should be subordinated to the creation of a diversified economy.download