Harnessing Windfall Revenues in Developing Economies: Sovereign wealth funds and optimal tradeoffs between citizen dividends, public infrastructure and debt reduction
AbstractA windfall of foreign aid or natural resource revenue faces government with choices of how to manage public borrowing, public asset accumulation, and the distribution of funds to households (across time and household types), particularly when the windfall is both anticipated and temporary. These choices are acute if some households do not have access to credit markets and are unable to smooth consumption, and if the country as a whole is not a price-taker in international capital markets - both reasonable descriptions of many developing countries experiencing resouce (or aid) booms. We analyse the optimal policy actions for countries in this positon and show that the usual permanent income hypothesis prescrition of engineering a permanent increase in consumption finance by borrowing ahead of the windfall and then accumulating a Soveriegn Wealth Fund (SWF) is not optimal. Heavily indebted countries with a small windfall should both increase current consumption and accumulate capital to accelerate their development. Only if the windfall is large relative to initial debt is it optimal to build a SWF. We study the inctricate dynamic trade-offs faced when using the windfall to pay off debt and possibly acumulate a SWF, build public infrastructure and hand out citizen dividends. Finally, we show that a more sophisticated range of instruments (e.g. an asset holding subsidy) makes the trade-offs easier.
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Bibliographic InfoPaper provided by Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford in its series OxCarre Working Papers with number 009.
Date of creation: 2008
Date of revision:
windfallpublic revenues; risk premium on foreign debt; public infrastructure; private investment; credit constraints; expropriation; optimal fiscal policy; debt management; Sovereign Wealth Fund; asset holding subsidy; developing economies;
Other versions of this item:
- van der Ploeg, Frederick & Venables, Anthony J., 2008. "Harnessing Windfall Revenues in Developing Economies: Sovereign Wealth Funds and Optimal Tradeoffs Between Citizen Dividends, Public Infrastructure and Debt Reduction," CEPR Discussion Papers 6954, C.E.P.R. Discussion Papers.
- E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- F35 - International Economics - - International Finance - - - Foreign Aid
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
- O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
- Q33 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Resource Booms (Dutch Disease)
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