Raising and Sharing Revenues from Natural Resources

Natural resources offer opportunities,
but also bring challenges. They have generally been linked
to a series of negative outcomes like economic decline,
corruption, and conflict. Oil and minerals reserves, in
particular, are often very spatially concentrated, and their
discovery becomes a potential source of conflict between the
governments, the people of the producing areas, and those of
the rest of the country. But can this increased risk of
conflict be prevented? Are there ways for the government to
change this course of events? This paper tries to contribute
to this discussion by looking at the international practices
in raising and sharing natural resource revenues (NRR) among
different levels of government. The study observes that
sharing NRR with subnational governments of the producing
areas is the prevailing practice worldwide. There is a
rationale to compensate the subnational government of the
producing areas for the negative environmental, social, and
economic impact of production activities. Assignment to all
- including the non-producing - subnational governments is
less frequent, although it is increasingly used
(particularly in Latin America). This option increases the
number of stakeholders and gives them incentives to exert
control. This is a relevant argument, particularly in
countries with a weak capacity of public scrutiny of
government activities. The volatility of revenue or the low
absorption capacity of small government units may
nevertheless create problems. Similarly, the allocation of
NRR to individuals with direct transfers, a complement to
the intergovernmental allocation rather than an alternative,
can increase the welfare of citizens by increasing their
scrutiny of NRR use by government.