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Resource rents; when to spend and how to save

  • Anthony Venables

    ()

Countries with substantial revenues from renewable resources face a complex range of revenue management issues. What is the optimal time profile of consumption from the revenue, and how much should be saved? Should saving be invested in foreign funds or in the domestic economy? How does government policy influence the private sector, where sustainable growth in the domestic economy must ultimately be generated? This paper develops the issues in a simple two-period model, and argues that analysis must go well beyond the simple permanent income approach sometimes recommended. In developing countries resource revenues relax constraints on the supplies of capital and of government funds. The level of saving should be somewhat lower than under the permanent income hypothesis because of the low income of the current generation. The composition of investment should be tilted to the domestic economy rather than foreign assets. Government prudence can be undermined by private sector expectations, so high levels of spending on public infrastructure may be appropriate as a commitment to invest.

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File URL: http://hdl.handle.net/10.1007/s10797-010-9137-9
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Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 17 (2010)
Issue (Month): 4 (August)
Pages: 340-356

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Handle: RePEc:kap:itaxpf:v:17:y:2010:i:4:p:340-356
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  1. Bhattacharyya, Sambit & Hodler, Roland, 2010. "Natural resources, democracy and corruption," European Economic Review, Elsevier, vol. 54(4), pages 608-621, May.
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  8. Timothy J. Besley & Torsten Persson, 2008. "The Incidence of Civil War: Theory and Evidence," NBER Working Papers 14585, National Bureau of Economic Research, Inc.
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