Resource‐driven victory

The vast popularity of distributive policies in many resource‐rich countries coincided with the oil and gas price hike of 2004. However, following the sharp decline of price in the late 2014, this popularity started waning and the tendency toward more productive policies gained traction. Using a theoretical model, this paper studies the optimal composition of public spending and demonstrates that, for a sufficiently low amount of any exogenous revenue, for example, resource revenue, investing revenue in productive public good is preferable. The representative agent prefers more distributive policies as resource revenue increases. A key determinant of the optimal composition of public spending is the inherited level of productivity. Countries with too low or too high productivity both find distributive policies more appealing even for a small amount of resource revenue. Yet, they have an essential difference. Resource revenue eradicates individuals' incentive to work in countries with low initial productivity while individuals always prefer to work in highly productive countries.