How to Tell When Your Country Is Managing Its Riches Well

An oil pump operates in the desert oil fields of Sakhir, Bahrain, at sunset Monday Oct. 29, 2012. The price of oil fell below
An oil pump operates in the desert oil fields of Sakhir, Bahrain, at sunset Monday Oct. 29, 2012. The price of oil fell below $86 a barrel Monday as a gargantuan storm headed for the heavily populated U.S. East Coast, where energy consumption was likely to drop as many businesses closed and transportation ground to a halt. (AP Photo/Hasan Jamali)

Say that your country is blessed with natural resources. Oil, gas, minerals -- it has it all. New technologies are leading to even more discoveries. Your president is on television on an almost daily basis signing new exploration deals -- likely with foreign companies -- or happily announcing new finds. The future looks good. But deep down you worry that the bonanza could turn into a bust -- maybe you live in Africa and have seen how windfalls have been wasted before. How do you know that's not going to happen now? Are there any tell-tale signs of sound management of "commodity wealth?" In fact, there are six.

First, the government publishes the contracts it signs with the companies that are given the right to explore, exploit and export. The idea is both to set an early tone of transparency around the whole business of extraction and, more important, to force public officials to develop enough negotiating and regulatory capacity of their own -- lest they be accused of incompetence or, worse, corruption. It seems simple enough, but not every country -- rich or poor -- discloses those contracts. [You can check whether your country does at].

Second, the price projections used to construct the government's budget are calculated by someone outside government. This is critical. The budget is like an annual authorization to spend. How much you spend depends on how much revenue you believe you will have, which in turn depends on what prices you think you will get for the commodities you export. Politicians tend to be grossly over-optimistic about those prices, because they always want to spend as much as possible on their constituencies. So, having an independent, technical, above-the-fray party calling or, at least, vetting the commodity prices on which the budget is based is a great sign of discipline. Not many countries do it -- or not yet -- but the few that do are seen as examples of good management (Chile comes to mind).

Third, some -- even a little -- of the rent from the exploitation of natural resources is saved. The money is put away in a "sovereign wealth fund," presumably to be used during bad times or by future generations. This is not only a powerful sign of fiscal prudence; it also helps keep society's attention on the extractive industry -- the media would have pointy questions if the fund suddenly stops growing or shrinks. Since 1990 the number of countries that have built these funds tripled -- to more than 40 -- and, together, they hold about five trillion dollars, the majority of which came from the sale of commodities. Good examples among emerging economies: Azerbaijan, Chile and Trinidad & Tobago. Good examples among developed countries: Australia, Norway and Singapore.

Fourth, the stock of public debt is falling. This is, of course, equivalent to accumulating revenues in a sovereign wealth fund. Paying down government debt is like a transfer of the commodity wealth to the young -- when they start working, they won't have to be taxed so heavily. You should worry if you see your country quickly depleting its oil or gold deposits and borrowing fast at the same time -- not an unusual sight, unfortunately.

Fifth, the evaluation of public investment projects is done by a team of professionals. This is the office in the ministry of finance or planning charged with making sense of the hundreds of project proposals generated by others parts of the government -- and with advising on which ones to pay for and which ones to drop. They need to know the ins and outs of almost every sector, from education to agriculture to transport. And, naturally, they are under enormous political pressure. The good ones try to frame their views as "result contracts" (what exactly is going to be achieved with each investment?) and are champions at distilling lessons from the past (what exactly was achieved with the money already spent?).

And sixth, the government's final accounts for the year -- the execution of the budget, if you will -- are audited on time, and the results are made public. [Question: can you name your country's Auditor General -- aka "Comptroller General" -- the person that is supposed to keep your leaders honest?] For many a developing country, these audits are usually incomplete or late, which renders every other fiscal precaution meaningless -- if nobody checks whether the approved budget is actually respected, there is little point in having a budget to start with.

Contracts, prices, savings, debts, investments and audits -- six ways to know when things are working fine. But if that's too much information for the average citizen to get, there is one other, less technical behavior that sets apart countries which manage their natural wealth prudently: they treat it as if it belonged to their children. Imagine that your kids receive a large inheritance for which you are the trustee. Would you spend it on your own consumption? Would you borrow against it? Or would you use part of it to give them a better education, good healthcare, physical security and a decent place to live, and save the rest for them to decide over when they grow up? We know the right answer to that. Well, what's true for our families is true for our countries, too.