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Harnessing windfall revenues: Optimal policies for resource-rich developing economies

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  • Rick Van der Ploeg
  • Tony Venables

Abstract

A windfall of natural resource revenue (or foreign aid) faces government with choices of how to manage public debt, investment, and the distribution of funds for consumption, particularly if the windfall is both anticipated and temporary.� Standard policy advice follows the permanent income hypothesis in suggesting a sustained increase in consumption supported by interest on accumulated foreign assets (a Sovereign Wealth Fund) once resource revenue are exhausted.� However, this strategy is not optimal for capital-scarce developing economies.� Incremental consumption should be skewed towards present generations, relative to those in the far future.� Savings should be directed to accumulation of domestic private and public capital rather than foreign assets.� Optimal policy depends on instruments available to government.� We study cases where the government can make lump-sum transfers to consumers; where such transfers are impossible so optimal policy involves cutting distortionary taxation in order to raise investment and wages; and where Ricardian consumers can borrow against future revenues so government only has indirect control of consumption.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 543.

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Date of creation: 01 Mar 2011
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Handle: RePEc:oxf:wpaper:543

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Keywords: Natural resource; Windfall public revenues; Risk premium on foreign debt; Public infrastructure; Private investment; Credit constraints; Optimal fiscal policy; Debt management; Sovereign Wealth Fund; Asset holding subsidy; developing economies;

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  1. Jan-Peter Olters & Daniel Leigh, 2006. "Natural-Resource Depletion, Habit Formation, and Sustainable Fiscal Policy: Lessons from Gabon," IMF Working Papers 06/193, International Monetary Fund.
  2. Tabellini, Guido & Alesina, Alberto, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Scholarly Articles 3612769, Harvard University Department of Economics.
  3. Mahbub Morshed, A. K. M. & Turnovsky, Stephen J., 2004. "Sectoral adjustment costs and real exchange rate dynamics in a two-sector dependent economy," Journal of International Economics, Elsevier, vol. 63(1), pages 147-177, May.
  4. 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.
  5. Bernardin Akitoby & Thomas Stratmann, 2006. "Fiscal Policy and Financial Markets," IMF Working Papers 06/16, International Monetary Fund.
  6. van Wijnbergen, Sweder J G, 1984. "The 'Dutch Disease': A Disease after All?," Economic Journal, Royal Economic Society, vol. 94(373), pages 41-55, March.
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