Natural Resources and Violent Conflict - WaterWiki.net

dampening price shocks 361flexibility, allowing their exchange rate to depreciate in the event of pricedeclines and to appreciate in the event of increases. Hence the change inexport prices expressed in foreign currency terms would be offset by thechange in the opposite direction of that currency’s price expressed indomestic currency. This solution intrinsically entails variability of thereal exchange rate (which governs the changes in relative prices of tradablesand nontradables). Such variability has, in the long term, an unfavorableimpact on macroeconomic stability and growth in developingeconomies. Oddly enough, in these circumstances, the solution consistsof making the Dutch disease the appropriate response to an exportreceipts boom.Offer a Guarantee Conditioned by RulesThe international community cannot content itself with stressing theimportance of sound domestic macroeconomic management for purposesof dampening shocks, in that such shocks specifically make theconduct of economic policy more difficult. The role of the internationalcommunity in response to shocks could be to act simultaneouslyto provide insurance and promote sound management. The generalidea is that the international community could help to introduce automaticstabilization mechanisms by financing their costs subject to theadoption of agreed and controllable management rules. In short, theinternational community would offer a guarantee in exchange for acommitment as to rules. This principle can be applied on a macroeconomicscale and on a microeconomic or sectoral scale.Adjust Debt Service in Response to Price ShocksIn the macroeconomic area, the principle whereby it is advisable tocompensate for instability and not just price drops can be applied in aproposal to tie the way the debt is treated to developments in commodityexport prices. Easing debt service when prices are low and raising itwhen prices are high exerts a countercyclical effect on public finances:the easing of external debt service makes it possible to maintain otherdomestic expenditure despite the decline in tax receipts induced by thedrop in export earnings, while increasing debt service in a period ofspiking prices prevents a destabilizing increase in public expenditurethat would be difficult to reverse. Such a system could be put in placefor any country that wanted it and would undertake to increase debtservice in the event of commodity price rises. Naturally, implementationof this system raises a number of problems. First, there is the problemof defining a reference price level for triggering the mechanism. Itseems logical to refer to a price corresponding to a trend value or to a