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Public Investment in Resource-Abundant Developing Countries

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Author Info

  • Andrew Berg
  • Rafael Portillo
  • Shu-Chun S. Yang
  • Luis-Felipe Zanna

Abstract

Natural resource revenues provide a valuable source to finance public investment in developing countries, which frequently face borrowing constraints and tax revenue mobilization problems. This paper develops a dynamic stochastic small open economy model to analyze the macroeconomic effects of investing natural resource revenues, making explicit the role of pervasive features in these countries including public investment inefficiency, absorptive capacity constraints, Dutch disease, and financing needs to sustain capital. Revenue exhaustibility raises medium-term issues of how to sustain capital built during a windfall, while revenue volatility raises short-term concerns about macroeconomic instability. Using the model, country applications show how combining public investment with a resource fund---a sustainable investing approach---can help address the macroeconomic problems associated with both exhaustibility and volatility. The applications also demonstrate how the model can be used to determine the appropriate magnitude of the investment scaling-up (accounting for the financing needs to sustain capital) and the adequate size of a stabilization fund (buffer).

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/274.

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Length: 48
Date of creation: 15 Nov 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/274

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Related research

Keywords: Public investment; Natural resources; Revenues; Resource allocation; Development; Developing countries; Cross country analysis; resource-rich developing countries; DSGE models; investment expenditures; private capital; tax revenue; interest income; investment projects; budget constraint; investment spending; government spending; tax rates; government budget constraint; direct investment; foreign capital; fiscal adjustments; fiscal policy; fiscal revenue; public investment spending; foreign direct investment; private investment; tax systems; risk premium; fiscal variables; investment return; fiscal policies; fiscal tools; tax increases; taxation; tax base; investment policies; foreign investment; government revenue; fiscal data; fiscal expenditures; investment management; expenditure levels; investment fund; public debt; fiscal authorities; fiscal expansions; investment needs; capacity utilization; increasing returns; fiscal instruments; fiscal rules; debt service; government expenditure;

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References

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  1. Anthony Venables, 2010. "Resource rents; when to spend and how to save," International Tax and Public Finance, Springer, vol. 17(4), pages 340-356, August.
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Cited by:
  1. Hostland, Douglas & Giugale, Marcelo M., 2013. "Africa's macroeconomic story," Policy Research Working Paper Series 6635, The World Bank.
  2. 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.

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