Apart from the financial wealth, the wealth of a nation also consists of physical capital like roads, bridges, factories and machineries; human capital which is the productivity of the workable population and natural capital like coal, oil natural gas, minerals, forests, wetlands and agricultural lands . Among all these wealth components the most pivotal is natural wealth as all other wealth depends upon natural wealth, The other components of wealth are derived from natural capital. The long term survival of a nation depends on how it manages its natural capital. In this paper we are going to discuss the ways in which an economy can manage its natural wealth to get the best out of it.
Ploeg suggests that to best manage natural resources, which he terms as natural resource windfall, is by maintaining three different funds . First is the intergenerational fund. Since the ‘natural resource windfall’ lasts only for a short period the consumption should be smoothed out across generations through this intergenerational fund. The natural resource is extracted and converted in other form of wealth. This has to be kept in the intergenerational fund so that same amount of consumption can be maintained over time even when the natural resource gradually fades out. If the windfall is an anticipated one the country can borrow now and repay in future.
Second is the liquidity fund which acts as an insurance against commodity price fluctuations . The volatility in the commodity market is managed through the liquidity fund. The third one is the investment fund that acts as a temporary park for provision of fund for investment projects. This is necessary for countries suffering from capital scarcity.
The prudent management of the three funds will take care of the natural resource wealth. The genuine savings (savings adjusted for resource depletion) of the nations should be positive so that there is long term sustainable growth of the economy.
References
Ploeg, Frederick van der. Guidelines for Exploiting Natural Resource Wealth. Research Paper. Oxford: OxCarre, 2013. English.
