7. Policy in practice: the use of stabilisation funds to mitigate cyclicality
A commonly used strategy is to keep windfall rents in an offshore “stabilisation” or “future” fund and not to rapidly expand state expenditure in line with the increasing resource revenues. These funds are then generally invested in a diverse basket of investment instruments (equity, bonds, currency markets, etc.) that will provide reliable revenue streams in future years, such the Norwegian “Future Fund”.
However, for countries that lack basic infrastructure, a proportion of these funds might well be better allocated to long-term infrastructure provision projects (roads, rail, ports, energy, water, telecoms, etc.) that would underpin the competitiveness of other sectors (diversification). This would “drip-feed” the boom rents back into the economy over a 10 to 20-year period and could in theory mitigate the “shock” effect of large foreign exchange inflows both on the balance of payments (current account) and the national budget.
However, it is extremely difficult for a poor state to resist the demands of its people for immediate, but unsustainable, poverty relief. It is therefore advisable for fiscal policies of this nature to be enshrined in law, with provisions to make it difficult for populist governments to use offshore funds to win short-term popularity.
“Stabilisation or future funds may also go some way in providing “inter-generational equity” over non-renewable resource extraction, as future generations would be the beneficiaries of the investments into improving the national infrastructural platform. The drip-feeding back of boom revenues would also give time for the development of local infrastructure contracting companies (construction and engineering) as well as supplier companies (cement, rebar, equipment, etc.), rather than exclusively relying on foreign contractors and suppliers (imports).”