April 2001, Stephen Everhart, Robert Duval-Hernandez / The World Bank, International Finance Corporation (IFC)
The macroeconomic impact of commodity windfalls has provided fertile ground for research since the 1970s. Particularly affected are developing economies that rely heavily on commodity exports. In the case of oil windfalls, cross-country experience is vast: Indonesia, Kazakhstan, Mexico, Nigeria, the Russian Federation, and Republica Bolivariana de Venezuela have all been buffeted by such windfalls. Everhart and DuvalHernandez investigate Mexico's experience.
They provide an overview of oil's impact on the Mexican economy and of the management of oil rents engineered by the government from the 1970s to date. A third of government revenues come from the hydrocarbon sector- especially oil exports. The reliance of public finances on a single commodity means that shocks threaten the economy's fiscal balance and stability.
Policy options for protecting the economy from volatility in oil revenues without eliminating the benefits from rising prices include a stabilization fund and hedging strategies on international markets, which the authors discuss. The stabilization fund smooths consumption and reduces the costs associated with volatile spending. The fund and hedging strategies can complement each other - the fund working as the main recipient of revenues, and the hedging strategies managing short-lived movements in prices. this joint strategy would also reduct the size of the fund and the probability of its going bankrupt.
