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Are Developing Countries Better Off Spending their Oil Wealth Upfront?

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Author Info
H. Takizawa
E. H. Gardner
Kenichi Ueda

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

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Length: 29 pages
Date of creation: 16 Aug 2004
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Handle: RePEc:imf:imfwpa:04/141

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Keywords: Fiscal policy ; Developing countries ; Public investment ; Oil revenues ; Economic growth ; Economic models ;

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  1. 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. [Downloadable!] (restricted)
  2. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March. [Downloadable!] (restricted)
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  3. Paul Cashin, 1994. "Government Spending, Taxes, and Economic Growth," IMF Working Papers 94/92, International Monetary Fund.
  4. Miller, Nigel James & Tsoukis, Christopher, 2001. "On the Optimality of Public Capital for Long-Run Economic Growth: Evidence from Panel Data," Applied Economics, Taylor and Francis Journals, vol. 33(9), pages 1117-29, July. [Downloadable!] (restricted)
  5. 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.
  6. 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. [Downloadable!] (restricted)
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  7. Clark A. Burdick, 1997. "A transitional analysis of the welfare cost of inflation," Working Paper 97-15, Federal Reserve Bank of Atlanta. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jens R. Clausen, 2008. "Calculating Sustainable Non-mineral Balances as Benchmarks for Fiscal Policy: The Case of Botswana," IMF Working Papers 08/117, International Monetary Fund. [Downloadable!]
  2. 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. [Downloadable!]
  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. [Downloadable!]
  4. Alonso Segura, 2006. "Management of Oil Wealth Under the Permanent Income Hypothesis: The Case of Sao Tome and Principe," IMF Working Papers 06/183, International Monetary Fund. [Downloadable!]
  5. 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. [Downloadable!]
  6. Antonio Spilimbergo, 2006. "Measuring the Performance of Fiscal Policy in Russia," IMF Working Papers 05/241, International Monetary Fund. [Downloadable!]
    Other versions:
  7. Daniel Leigh & Stéphane Carcillo & Mauricio Villafuerte, 2007. "Catch-Up Growth, Habits, Oil Depletion, and Fiscal Policy: Lessons from the Republic of Congo," IMF Working Papers 07/80, International Monetary Fund. [Downloadable!]
  8. Daniel Leigh & Jan-Peter Olters, 2006. "Natural-Resource Depletion, Habit Formation, and Sustainable Fiscal Policy: Lessons from Gabon," IMF Working Papers 06/193, International Monetary Fund. [Downloadable!]
  9. 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. [Downloadable!]
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