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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. Copyright 2005 Blackwell Publishing Ltd..

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Bibliographic Info

Article provided by Wiley Blackwell in its journal World Economy.

Volume (Year): 28 (2005)
Issue (Month): 10 (October)
Pages: 1401-1415

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Handle: RePEc:bla:worlde:v:28:y:2005:i:10:p:1401-1415

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Cited by:
  1. van der Ploeg, Frederick & Venables, Anthony J., 2008. "Harnessing Windfall Revenues in Developing Economies: Sovereign Wealth Funds and Optimal Tradeoffs Between Citizen Dividends, Public Infrastructure and Debt Reduction," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6954, C.E.P.R. Discussion Papers.
  2. Rick van der Ploeg & Anthony J Venables, 2010. "Absorbing A Windfall Of Foreign Exchange: Dutch disease dynamics," OxCarre Working Papers, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford 052, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  3. Grant Bishop & Anwar Shah, 2008. "Fiscal Federalism and Petroleum Resources in Iraq," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper0826, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  4. Jan-Peter Olters & Daniel Leigh, 2006. "Natural-Resource Depletion, Habit Formation, and Sustainable Fiscal Policy," IMF Working Papers 06/193, International Monetary Fund.

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