Key message 3 – Robust institutions are required to ensure natural resource wealth support inclusive growth

What makes the policy chain above difficult is that many of these decisions are interdependent, but are taken separately by different people or different groups. This makes harnessing natural resources a weakest link problem. If any link in the chain is broken, the outcome will be problematic.

Further, it is often difficult to lock future politicians into commitments. For example, money saved by a prudent finance minister might be squandered by a successor and this risk reduces the incentive for prudence in the first place. Fortunately, there are examples of societies which have successfully mitigated this risk, one being Botswana (see box on the right-hand side of the page). However, as in Botswana, strong political actions need be taken to build the institutions that maintain the integrity of the NRM policy chain. Indeed, to ensure good resource policies are in place, countries need to build robust rules and institutions, and ensure that citizens are supportive of them.

All rules, whether legislative or informal, are only effective if implemented – their mere existence is insufficient to constrain a government from succumbing to the temptations of excess public consumption. The force of rules depends on proper monitoring and enforcement capacity, which come out of strong institutions. The only way those rules and institutions will be strong is for them to be understood and supported by a body of citizens – which we call the ‘critical mass’ – who are collectively sufficiently influential to protect them. Only with such a critical mass is there enough pressure on politicians not to break rules. It is, however, not easy to build that critical mass, and to develop that informed understanding of natural resource management.

Getting it right: The example of diamonds in Botswana

The example of diamonds in Botswana illustrates the importance of the political process in ensuring positive outcomes. Although Botswana has always been a functioning democracy, when the government first received diamond revenues, it successfully managed to protect them. President Ian Khama achieved good stewardship of diamond revenues through adept domestic political leadership. The rules and institutions created to implement asset accumulation were unremarkable: Firstly, a balanced budget rule and secondly, a sovereign wealth fund. These could readily have been subverted had Parliament and the Ministry of Finance wished to do so. But President Khama and his successors countered inflated expectations by explaining the case for investment, as encapsulated in the slogan ‘We’re poor and so we have to carry a heavy load.’ Having built the case for deferring consumption, President Khama maintained trust by ensuring that elite corruption was unacceptable. The government also followed this up with a sustained education campaign to encourage prudence in the population. Successive governments have been able to preserve highly prudent behaviour for several decades, and thus accumulate massive foreign exchange reserves, without either dedicated foreign funds or complex rule structures (Collier & Venables 2011).