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Resource Windfalls, Optimal Public Investment and Redistribution

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Author Info

  • Alan H. Gelb
  • Arnaud Dupuy
  • Rabah Arezki

Abstract

This paper studies the optimal public investment decisions in countries experiencing a resource windfall. To do so, we use an augmented version of the Permanent Income framework with public investment faced with adjustment costs capturing the associated administrative capacity as well as government direct transfers. A key assumption is that those adjustment costs rise with the size of the resource windfall. The main results from the analytical model are threefold. First, a larger resource windfall commands a lower level of public capital but a higher level of redistribution through transfers. Second, weaker administrative capacity lowers the increase in optimal public capital following a resource windfall. Third, higher total factor productivity in the non-resource sector reduces the degree of des-investment in public capital commanded by weaker administrative capacity. We further extend our basic model to allow for "investing in investing" - that is public investment in administrative capacity - by endogenizing the adjustment cost in public investment. Results from the numerical simulations suggest, among other things, that a higher initial stock of public administrative "know how" leads to a higher level of optimal public investment following a resource windfall. Implications for policy are discussed.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/200.

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Length: 34
Date of creation: 01 Aug 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/200

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Related research

Keywords: Public investment; Economic models; Natural resources; Resource allocation; Revenues; capital investment; investment management; investor protection; public investment programs; net foreign assets; government expenditure; private capital; natural capital; investment projects; investment decisions; expropriation; domestic investment; discounted value; foreign companies; level of public spending;

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References

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  1. Sebnem Kalemli-Ozcan & Laura Alfaro & Vadym Volosovych, 2003. "Why doesn’t Capital Flow from Rich to Poor Countries? An Empirical Investigation," Working Papers 2003-01, Department of Economics, University of Houston.
  2. Frederick Van der Ploeg, 2010. "Natural Resources: Curse or Blessing?," CESifo Working Paper Series 3125, CESifo Group Munich.
  3. Zac Mills & Annette Kyobe & Jim Brumby & Chris Papageorgiou & Era Dabla-Norris, 2011. "Investing in Public Investment," IMF Working Papers 11/37, International Monetary Fund.
  4. Daron Acemoglu & Simon Johnson, 2005. "Unbundling Institutions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 949-995, October.
  5. Kazim Kazimov & Kirk Hamilton & Rabah Arezki, 2011. "Resource Windfalls, Macroeconomic Stability and Growth," IMF Working Papers 11/142, International Monetary Fund.
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Cited by:
  1. Rabah Arezki & Herbert Lui & Marc Quintyn & Frederik G Toscani, 2012. "Education Attainment in Public Administration Around the World," IMF Working Papers 12/231, International Monetary Fund.
  2. Shantayanan Devarajan, Marcelo Giugale, 2013. "The Case for Direct Transfers of Resource Revenues in Africa-Working Paper 333," Working Papers 333, Center for Global Development.
  3. Go, Delfin S. & Robinson, Sherman & Thierfelder, Karen & Utz, Robert, 2013. "Dutch disease and spending strategies in a resource-rich low-income country -- the case of Niger," Policy Research Working Paper Series 6691, The World Bank.

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