Revenue from resource extraction can be harnessed to support the creation of employment and income in various sectors. Opportunities arise from the direct stimulus created by the resource sector, as well as from the availability of funds generated by resource revenues. This employment and income will be created largely by the private sector, but government has a role in facilitating it. Investment may take place in resource-related activities, in line with the view that the resource sector should yield direct benefits and local economic activity over and above tax and royalty payments. But countries will also want to ensure that non-resource sectors are enabled to grow.

A useful role of government is to create the investment climate and public goods that are complementary to private investment. This involves the removal of impediments to private investment. Because a resource boom brings about structural change in the economy it is particularly important that the business and regulatory environment is supportive of new investments and flexible enough to allow redeployment of capital and labor across sectors of the economy. Potential bottlenecks—for example in the construction sector—can be identified and addressed. Openness to international trade, for example, can help to mitigate them.

Government may wish to use incentives targeted at particular sectors of the economy or specific economic activities. The case for such intervention is strengthened in the presence of market failures which prevent or impede firms from being able to undertake potentially high-return investments. However, such policies carry risks; witness the numerous ‘white elephants’ in many resource-rich economies. If such policies are to be implemented then several design principles should be followed. First, investments should be credibly expected to attain long-run commercial viability. Investments that fail this test are likely to destroy rather than add value, and will be a continuing drain on public funds. Second, government support should be linked to success, not failure. Open-ended support packages should be avoided. Support should involve credible criteria for termination in the case of continuing poor performance. Lobbying by interested parties is frequently an obstacle to this, so decisions should be taken at a high level and in consultation with a wide section of society—consumers and taxpayers as well as producer interests.

In selecting sectors for promotion there is a tension between building resource-related sectors and diversifying the economy away from dependence on a narrow resource base. The choices that have to be made here are country-specific, but there are several guiding principles.

1. Where an extracted resource incurs significant transportation costs in its unprocessed form there may exist opportunities to invest in downstream processing and value-added. This may not be the best option due to high capital intensity, dependence on imported skills and equipment, and the possibility that it may create relatively few jobs.
2. There may exist opportunities for supplying inputs to resource extraction (upstream investment) such as providing goods and services, as well as expertise, to extraction partners.
3. If the resource is easily traded internationally (e.g. oil and high-value minerals) then the best option is likely to be to export the resource and use the funds to invest in diversification into other sectors.

Decisions for investment in downstream processing should be based on assessment of countries’ capabilities and long-term comparative advantage, including the likelihood of achieving world-level efficiency or commercial viability. Where the resource is less readily traded (e.g. gas, low value minerals) or likely to have significant local demand, the case for developing downstream sectors is strong. Gas is particularly worthy of note here because of its linkages to power generation, a pre-requisite for economic development. It has a lower capital intensity compared to alternatives such as oil, coal, and nuclear, as well as hydro power and other renewables.

Economic activities supplying the resource sector (upstream activities) may offer viable opportunities for investment. A full spectrum of goods and services will be required, ranging from catering and accommodation to specialized equipment and geological analysis. While local firms are unlikely to be competitive in highly specialized areas, or are likely to lack the capabilities to meet demand for particular services, there may be opportunities to build capabilities in cooperation with external partners. The role of government can include requiring investors to use local sourcing or other levers to build the competitiveness of local firms. Large investors often have access to technology, skills and standards which would make local firms more competitive. Governments can require investors to develop a package of local sourcing and knowledge transfer as part of their bid for concessions, or in post-award negotiation.

It should be noted that laws which simply require a portion of investor expenditures to be made inside the country may lead to adverse and unintended effects. These can include rent-seeking, importing products without adding jobs or value locally, and the build-up of local industry which is non-competitive once the investor departs. As a general rule, laws that incentivize long-term competitiveness are superior to laws that incentivize short-term purchasing alone.

Diversification of the economy presents a viable development path for many countries with resource wealth. In many cases the structural changes associated with resource wealth, combined with the increased availability of domestic capital, create opportunities for diversification of the economy away from resource dependence and for building for future prosperity beyond the lifetime of the resource. Successful diversification of the economy is most likely to result from private investment supported by government policy and public investments rather than from an attempt to ‘pick winners’ or foster specific industries outside the resource sectors. In cases where comparative advantage in downstream processing industries is unlikely, diversification of the economy is the preferred use of increased capital availability.