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Are Developing Countries Better off Spending their Oil Wealth Upfront?

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  • H. Takizawa
  • E. H. Gardner
  • Kenichi Ueda

Abstract

We question the conventional view that it is optimal for government to maintain a stable level of spending out of oil wealth. We compare this conventional policy recommendation with one where government spends all of its oil revenues upfront, at the same rate as oil is extracted. Using a neoclassical growth model with positive external effects of public spending on consumption and productivity, we find that, if the economy is growing along the steady-state balanced path, the conventional view is validated. However, if the economy starts with a lower capital stock, the welfare ranking across two policies can be reversed.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/141.

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Length: 29
Date of creation: 01 Aug 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/141

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Keywords: Public investment; Developing countries; Oil revenues; Economic growth; Economic models; government spending; fiscal policy; budget constraint; fiscal balance; private consumption; consumption good; consumption goods; government purchases; public spending; level of consumption; fiscal policy rules; consumption over time; capital accumulation; tax revenues; fiscal policies; permanent consumption; consumption value; fiscal strategies; capital income; foreign capital; tax income; fiscal rule; public expenditure; consumption path; business cycles; investment function; government budget; account deficits; fiscal adjustment; fiscal strategy; consumption level; taxation; intertemporal consumption; domestic production; fiscal policy rule; consumption externality; consumption component; government budget constraint; fiscal sustainability; consumption smoothing; primary deficit; expenditure composition; budget constraints; fiscal choice; general equilibrium;

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References

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  1. Clark A. Burdick, 1997. "A transitional analysis of the welfare cost of inflation," Working Paper 97-15, Federal Reserve Bank of Atlanta.
  2. Khan, Mohsin S. & Reinhart, Carmen M., 1990. "Private investment and economic growth in developing countries," World Development, Elsevier, vol. 18(1), pages 19-27, January.
  3. Kneller, Richard & Bleaney, Michael F. & Gemmell, Norman, 1999. "Fiscal policy and growth: evidence from OECD countries," Journal of Public Economics, Elsevier, vol. 74(2), pages 171-190, November.
  4. Paul Cashin, 1994. "Government Spending, Taxes, and Economic Growth," IMF Working Papers 94/92, International Monetary Fund.
  5. Nigel James Miller & Christopher Tsoukis, 2001. "On the optimality of public capital for long-run economic growth: evidence from panel data," Applied Economics, Taylor & Francis Journals, vol. 33(9), pages 1117-1129.
  6. Khan, Mohsin S & Kumar, Manmohan S, 1997. "Public and Private Investment and the Growth Process in Developing Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(1), pages 69-88, February.
  7. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
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Citations

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Cited by:
  1. Jan-Peter Olters, 2007. "Old Curses, New Approaches? Fiscal Benchmarks for Oil-Producing Countries in Sub-Saharan Africa," IMF Working Papers 07/107, International Monetary Fund.
  2. Issouf Samaké & Priscilla S. Muthoora & Bruno Versailles, 2013. "Fiscal Sustainability, Public Investment, and Growth in Natural Resource-Rich, Low-Income Countries," IMF Working Papers 13/144, International Monetary Fund.
  3. Toto Same, Achille, 2009. "Transforming natural resource wealth into sustained growth and poverty reduction : a conceptual framework for Sub-Saharan African oil exporting countries," Policy Research Working Paper Series 4852, The World Bank.
  4. Tsani, Stella, 2013. "Natural resources, governance and institutional quality: The role of resource funds," Resources Policy, Elsevier, vol. 38(2), pages 181-195.
  5. Christine J. Richmond & Irene Yackovlev & Shu-Chun S. Yang, 2013. "Investing Volatile Oil Revenues in Capital-Scarce Economies," IMF Working Papers 13/147, International Monetary Fund.
  6. Jan-Peter Olters & Daniel Leigh, 2006. "Natural-Resource Depletion, Habit Formation, and Sustainable Fiscal Policy," IMF Working Papers 06/193, International Monetary Fund.
  7. Torfinn Harding & Frederick Van der Ploeg, 2009. "Is Norway's Bird-in-Hand Stabilization Fund Prudent Enough? Fiscal Reactions to Hydrocarbon Windfalls and Graying Populations," CESifo Working Paper Series 2830, CESifo Group Munich.
  8. Reda Cherif & Fuad Hasanov, 2012. "Oil Exporters' Dilemma," IMF Working Papers 12/4, International Monetary Fund.
  9. Antonio Spilimbergo, 2005. "Measuring the Performance of Fiscal Policy in Russia," IMF Working Papers 05/241, International Monetary Fund.
  10. Alonso Segura, 2006. "Management of Oil Wealth Under the Permanent Income Hypothesis," IMF Working Papers 06/183, International Monetary Fund.
  11. Toto Same, Achille, 2008. "Windfall management for poverty reduction : improving public finance Management-the case of Chad," Policy Research Working Paper Series 4596, The World Bank.
  12. Peter Wierts & Guido Schotten, 2008. "Dutch natural Gas Revenues and Fiscal Policy: Theory versus Practice," DNB Occasional Studies 605, Netherlands Central Bank, Research Department.
  13. Juliana Dutra Araujo & Grace Bin Li & Marcos Poplawski-Ribeiro & Luis-Felipe Zanna, 2013. "Current Account Norms in Natural Resource Rich and Capital Scarce Economies," IMF Working Papers 13/80, International Monetary Fund.
  14. Toto Same, Achille, 2008. "Mineral-rich countries and dutch disease : understanding the macroeconomic implications of windfalls and the development prospects-the case of Equatorial Guinea," Policy Research Working Paper Series 4595, The World Bank.
  15. Jean-Luc Hélis & Teresa Dabán Sánchez, 2010. "A Public Financial Management Framework for Resources-Producing Countries," IMF Working Papers 10/72, International Monetary Fund.
  16. Cherif, Reda & Hasanov, Fuad, 2013. "Oil Exporters’ Dilemma: How Much to Save and How Much to Invest," World Development, Elsevier, vol. 52(C), pages 120-131.
  17. Stéphane Carcillo & Mauricio Villafuerte & Daniel Leigh, 2007. "Catch-Up Growth, Habits, Oil Depletion, and Fiscal Policy," IMF Working Papers 07/80, International Monetary Fund.
  18. Jiří Sýkora, 2013. "Oil in Timor-Leste: A Ticket to Prosperity?," Acta Oeconomica Pragensia, University of Economics, Prague, vol. 2013(3), pages 68-85.
  19. Jens R. Clausen, 2008. "Calculating Sustainable Non-Mineral Balances As Benchmarks for Fiscal Policy," IMF Working Papers 08/117, International Monetary Fund.

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