250 percent of the global average,<sup>30</sup> with road freight delays 2-3 times as long as in Asia. Lacking financial resources and the appropriate policy frameworks, many of these countries are often unable to sustain much needed investment and maintenance expenditures.<sup>31</sup> In such contexts, the effective fiscal strategy would not be to keep natural resource revenues in sovereign funds and invest in foreign equity markets or projects but, rather, to use a substantial portion of the revenues for financing domestic or regional projects that facilitate economic development and structural change—i.e., projects that stimulate the development of new manufacturing industries, diversify the economy, provide jobs and offer the potential of continuous upgrading.<sup>32</sup>

# _Monetary Policy_

Old structural economics suggested that monetary policy should be under government control (not independent central banks) and directed at influencing interest rates and even sector credit allocation. But it also acknowledged that many other factors that influence the investment demandschedule in developing countries are too powerful for monetary policy alone to achieve sufficient levels of investment, channel resources in strategic sectors, and combat unemployment.

Building on lessons from the rational expectations revolution, neoclassical economists doubted the idea that monetary policy could be used to support industrial development. It recommended that its main goal be price stability, and advocated the use of short-term interest rates by independent central banks to maintain the general level of prices (or to control money supply growth), and not to stimulate economic activity and trigger inflation. Commenting on the substantial decline in macroeconomic volatility around the world in recent decades—at least prior to the 2007 global crisis—(the so-called “Great moderation”), which he called “one of the most striking features of the economic landscape over the past twenty years,” Bernanke (2004) wrote: “Few disagree that monetary policy has played a large part in stabilizing inflation, and so the fact that output volatility has declined in parallel with inflation volatility, both in the United States and abroad, suggests that monetary policy may have helped moderate the variability of output as well.” New structural economics envisions the possibility of using interest rate policy in developing countries as a counter-cyclical tool and as an instrument to encourage infrastructure and industrial

> 30As percent of cost. Source: UNCTAD Statistical Database.

> 31 Recent research suggests that _economic_ returns on investment projects in developing countries averages at 30–40 percent for telecommunications, over 40 percent for electricity generation, and more than 200 percent for roads.  In Thailand, production loss due to power outages represents more than 50 percent of the total indirect costs of doing business in 2006. Firms often rely on their own generators to supplement the unreliable public electricity supply. In Pakistan, over 60 percent of firms surveyed in 2002 owned a generator. The cost of maintaining a power generator is often high and burdensome, especially for small and medium-size firms, which tend to be an important source of employment. Yet, while these costs must be privately borne, their benefits are felt across the economy.

32 The exploitation of natural resources can generate large amount of revenues but it is generally very capital-intensive and provides limited job opportunities. In a recent visit to Papua New Guinea, I observed that the Ok Tedi copper and gold mine in Tabubil, Papua New Guinea generates almost 80 percent of the country’s export and 40 percent of government revenues but provides only 2000 jobs. A proposed liquefied natural gas project will double Papua New Guinea’s national income after its completion in 2012, but the project will only provide 8,000 jobs. The majority of Papua New Guinea’s 6.5 million populations still live on subsistence agriculture. The contrast between the living of a few elite workers in modern mining and that of subsistence farmers is becoming a source of social tensions. A similar observation can be made about Botswana: the failure to diversify the economy from the diamond mining and to generate employment opportunities may explain the widening of disparity and deterioration of various human and social indicators, despite the diamond industry’s great success in sustaining Botswana’s growth miracle in the past 40 years.

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