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Asset Policies During an Oil Windfall: Some Simple Analytics

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  • Paul Collier
  • Jan Willem Gunning

Abstract

Many developing countries are currently experiencing oil windfalls, whether due to discoveries or to price effects. Such windfalls pose a series of policy dilemmas. The literature has focused on one of these: the choice between using windfall savings for public capital formation and investment in foreign assets. There are good theoretical reasons for investing a substantial part of the windfall initially abroad: the return to investment would fall below the world interest rate if the windfall were to be used entirely for domestic investment. Investing abroad offers an escape from diminishing returns: foreign assets can be repatriated gradually and used for domestic investment. However, in practice the efficient balance between domestic and foreign assets is politically difficult to sustain. Also, even if politically feasible this strategy is inefficient due to the failure to expand the private capital stock (‘equipment’). The policy problem is that the government cannot undertake such investment itself and trying to induce private agents to undertake equipment investment by transferring part of the windfall to them is likely to fail as a result of information problems. We argue that domestic debt repayment solves this dilemma. It has the added advantage of making foreign asset accumulation difficult to reverse.

Suggested Citation

  • Paul Collier & Jan Willem Gunning, 2005. "Asset Policies During an Oil Windfall: Some Simple Analytics," The World Economy, Wiley Blackwell, vol. 28(10), pages 1401-1415, October.
  • Handle: RePEc:bla:worlde:v:28:y:2005:i:10:p:1401-1415
    DOI: 10.1111/j.1467-9701.2005.00741.x
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    References listed on IDEAS

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    1. Mr. Jakob E Christensen, 2004. "Domestic Debt Markets in Sub-Saharan Africa," IMF Working Papers 2004/046, International Monetary Fund.
    2. Bevan, David & Collier, Paul & Gunning, Jan Willem, 1999. "The Political Economy of Poverty, Equity, and Growth: Nigeria and Indonesia," OUP Catalogue, Oxford University Press, number 9780195209860.
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    1. van der Ploeg, Frederick & Venables, Anthony, 2008. "Harnessing Windfall Revenues in Developing Economies: Sovereign Wealth Funds and Optimal Tradeoffs Between Citizen Dividends, P," CEPR Discussion Papers 6954, C.E.P.R. Discussion Papers.
    2. van der Ploeg, Frederick & Venables, Anthony J., 2013. "Absorbing a windfall of foreign exchange: Dutch disease dynamics," Journal of Development Economics, Elsevier, vol. 103(C), pages 229-243.
    3. Leonardo G. Romeo & Mohamed El Mensi, 2011. "The Difficult Road to Local Autonomy in Yemen: Decentralization Reforms between Political Rationale and Bureaucratic Resistances in a Multi-party Democracy of the Arabian Peninsula," Chapters, in: Jorge Martinez-Vazquez & François Vaillancourt (ed.), Decentralization in Developing Countries, chapter 15, Edward Elgar Publishing.
    4. Grant Bishop & Anwar Shah, 2008. "Fiscal Federalism and Petroleum Resources in Iraq," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0826, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    5. Snorre Lindset & Knut Anton Mork, 2019. "Risk Taking and Fiscal Smoothing with Sovereign Wealth Funds in Advanced Economies," IJFS, MDPI, vol. 7(1), pages 1-24, January.
    6. Titus Isaiah Zayone & Shida Rastegari Henneberry & Riza Radmehr, 2020. "Effects of Agricultural, Manufacturing, and Mineral Exports on Angola’s Economic Growth," Energies, MDPI, vol. 13(6), pages 1-17, March.
    7. Mr. Jan-Peter Olters & Mr. Daniel Leigh, 2006. "Natural-Resource Depletion, Habit Formation, and Sustainable Fiscal Policy: Lessons from Gabon," IMF Working Papers 2006/193, International Monetary Fund.
    8. Jorge Martinez-Vazquez & François Vaillancourt (ed.), 2011. "Decentralization in Developing Countries," Books, Edward Elgar Publishing, number 14175.

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