This paper discusses some of the challenges that confront oil-rich developing countries in their development path. These challenges include Dutch disease-related phenomena, macroeconomic volatility, weak governance, and constraints to institutional capacity development, which although are not inherent to these countries are likely to be accentuated in the presence of abundant natural resources. The paper also discusses options available to policymakers on how to best manage oil revenues and avoid negative externalities associated with the Paradox of Plenty. The paper concludes by stressing that one of the surest ways governments in oil-rich developing countries have at their disposal to avoid the so-called curse of oil is through the insulation of fiscal policy from the volatility associated with the price of oil. Moreover, the paper calls attention to the fact that efforts to promote improvements in governance and institutions are equally important, but will not go far if natural resource revenues, and in particular oil revenues, are not used to foster better development outcomes. This suggests that, having formulated economic policy responses, it is essential to work out political trade-offs in order to get the policies to work as effectively as possible within a specific country.
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