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Harnessing Windfall Revenues: Optimal Policies for Resource‐Rich Developing Economies

Author

Listed:
  • Frederick van der Ploeg
  • Anthony J. Venables

Abstract

A windfall of natural resources (or aid) faces government with choices of how to manage public debt, investment and the distribution of funds for consumption. The permanent income hypothesis suggests a sustained increase in consumption supported, once resources are depleted, by interest on accumulated foreign assets. However, this strategy is not optimal for capital-scarce developing economies. Incremental consumption should be skewed towards present generations. Savings should be directed to accumulation of domestic private and public capital rather than foreign assets. Optimal policy depends on the impact of distortionary taxation and ability of consumers to borrow against future revenues.

Suggested Citation

  • Frederick van der Ploeg & Anthony J. Venables, 2011. "Harnessing Windfall Revenues: Optimal Policies for Resource‐Rich Developing Economies," Economic Journal, Royal Economic Society, vol. 121(551), pages 1-30, March.
    • Handle: RePEc:ecj:econjl:v:121:y:2011:i:551:p:1-30
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    File URL: http://hdl.handle.net/10.1111/j.1468-0297.2010.02411.x
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    JEL classification:

    • 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
    • O11 - Economic Development, Innovation, 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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