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Resource Windfalls, Optimal Public Investment and Redistribution: The Role of Total Factor Productivity and Administrative Capacity

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  • AREZKI Rabah
  • DUPUY Arnaud
  • GELB Alan

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 CEPS/INSTEAD in its series CEPS/INSTEAD Working Paper Series with number 2013-12.

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Length: 36 pages
Date of creation: Jun 2013
Date of revision:
Handle: RePEc:irs:cepswp:2013-12

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Keywords: Resource Windfall; Public Investment; Total Factor Productivity; Administrative capacity;

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References

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  1. Daron Acemoglu & Simon Johnson, 2005. "Unbundling Institutions," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(5), pages 949-995, October.
  2. Alan Gelb & Caroline Decker, 2012. "Cash at Your Fingertips: Biometric Technology for Transfers in Developing Countries," Review of Policy Research, Policy Studies Organization, Policy Studies Organization, vol. 29(1), pages 91-117, 01.
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  7. Michael A. Clemens, 2011. "Economics and Emigration: Trillion-Dollar Bills on the Sidewalk?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 25(3), pages 83-106, Summer.
  8. Frankel, Jeffrey A., 2012. "The Natural Resource Curse: A Survey of Diagnoses and Some Prescriptions," Scholarly Articles, Harvard Kennedy School of Government 8694932, Harvard Kennedy School of Government.
  9. Frederick Van der Ploeg, 2010. "Natural Resources: Curse or Blessing?," CESifo Working Paper Series, CESifo Group Munich 3125, CESifo Group Munich.
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Cited by:
  1. Shantayanan Devarajan, Marcelo Giugale, 2013. "The Case for Direct Transfers of Resource Revenues in Africa-Working Paper 333," Working Papers, Center for Global Development 333, Center for Global Development.
  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, International Monetary Fund 13/144, International Monetary Fund.
  3. Dobronogov, Anton & Gelb, Alan & Saldanha, Fernando Brant, 2014. "How should donors respond to resource windfalls in poor countries ? from aid to insurance," Policy Research Working Paper Series, The World Bank 6952, The World Bank.
  4. 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, The World Bank 6691, The World Bank.
  5. Cavalcanti, Carlos B. & Marrero, Gustavo A. & Le, Tuan Minh, 2014. "Measuring the impact of debt-financed public investment," Policy Research Working Paper Series, The World Bank 6766, The World Bank.

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