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Bottlenecks in ramping up public investment

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  • Frederick Ploeg

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Abstract

A windfall in a developing economy with capital scarcity and investment adjustment costs facing a temporary windfall should be used to give more consumption to poorer present generations and to speed up development by ramping up public investment and paying off debt taking due account of the increasing inefficiency as investment gets ramped up. The optimal strategy requires negative genuine saving; the permanent income requires zero genuine saving. The optimal real consumption increments are smaller once one allows for absorption constraints resulting from Dutch disease and sluggish adjustment of ‘home-grown’ public capital. Copyright Springer Science+Business Media, LLC 2012

Suggested Citation

  • Frederick Ploeg, 2012. "Bottlenecks in ramping up public investment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(4), pages 509-538, August.
  • Handle: RePEc:kap:itaxpf:v:19:y:2012:i:4:p:509-538 DOI: 10.1007/s10797-012-9225-0
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    References listed on IDEAS

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    1. 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.
    2. Daron Acemoglu & Philippe Aghion & Leonardo Bursztyn & David Hemous, 2012. "The Environment and Directed Technical Change," American Economic Review, American Economic Association, pages 131-166.
    3. Anne D. Boschini & Jan Pettersson & Jesper Roine, 2007. "Resource Curse or Not: A Question of Appropriability," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(3), pages 593-617, September.
    4. Halvor Mehlum & Karl Moene & Ragnar Torvik, 2006. "Institutions and the Resource Curse," Economic Journal, Royal Economic Society, vol. 116(508), pages 1-20, January.
    5. van der Ploeg, Frederick, 2010. "Why do many resource-rich countries have negative genuine saving?: Anticipation of better times or rapacious rent seeking," Resource and Energy Economics, Elsevier, vol. 32(1), pages 28-44, January.
    6. Pritchett, Lant, 2000. "The Tyranny of Concepts: CUDIE (Cumulated, Depreciated, Investment Effort) Is Not Capital," Journal of Economic Growth, Springer, vol. 5(4), pages 361-384, December.
    7. Neary, Peter, 1988. "Determinants of the Equilibrium Real Exchange Rate," American Economic Review, American Economic Association, pages 210-215.
    8. Corden, W M, 1984. "Booming Sector and Dutch Disease Economics: Survey and Consolidation," Oxford Economic Papers, Oxford University Press, vol. 36(3), pages 359-380, November.
    9. Frederick van der Ploeg, 2011. "Natural Resources: Curse or Blessing?," Journal of Economic Literature, American Economic Association, vol. 49(2), pages 366-420, June.
    10. Paul Collier & Rick Van Der Ploeg & Michael Spence & Anthony J Venables, 2010. "Managing Resource Revenues in Developing Economies," IMF Staff Papers, Palgrave Macmillan, vol. 57(1), pages 84-118, April.
    11. Torvik, Ragnar, 2001. "Learning by doing and the Dutch disease," European Economic Review, Elsevier, vol. 45(2), pages 285-306, February.
    12. van der Ploeg, Frederick & Venables, Anthony J., 2013. "Absorbing a windfall of foreign exchange: Dutch disease dynamics," Journal of Development Economics, Elsevier, pages 229-243.
    13. Frederick van der Ploeg, 1993. "A Closed-form Solution for a Model of Precautionary Saving," Review of Economic Studies, Oxford University Press, vol. 60(2), pages 385-395.
    14. John Hartwick, 1977. "Intergenerational Equity and the Investment of Rents from Exhaustible Resources in a Two Sector Model," Working Papers 281, Queen's University, Department of Economics.
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    18. Bernardin Akitoby & Thomas Stratmann, 2008. "Fiscal Policy and Financial Markets," Economic Journal, Royal Economic Society, vol. 118(533), pages 1971-1985, November.
    19. Anthony Venables, 2010. "Resource rents; when to spend and how to save," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(4), pages 340-356, August.
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    Citations

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    Cited by:

    1. van der Ploeg, Frederick, 2016. "Macro Policy Responses to Natural Resource Windfalls and the Crash in Commodity Prices," CEPR Discussion Papers 11520, C.E.P.R. Discussion Papers.
    2. Agénor, Pierre-Richard, 2016. "Optimal fiscal management of commodity price shocks," Journal of Development Economics, Elsevier, vol. 122(C), pages 183-196.
    3. Melina, Giovanni & Yang, Shu-Chun S. & Zanna, Luis-Felipe, 2016. "Debt sustainability, public investment, and natural resources in developing countries: The DIGNAR model," Economic Modelling, Elsevier, vol. 52(PB), pages 630-649.
    4. Ton S van den Bremer & Frederick van der Ploeg, 2013. "Managing and Harnessing Volatile Oil Windfalls," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(1), pages 130-167, April.
    5. van der Ploeg, Frederick & Venables, Anthony J., 2013. "Absorbing a windfall of foreign exchange: Dutch disease dynamics," Journal of Development Economics, Elsevier, pages 229-243.
    6. Samuel Wills, 2012. "Optimal Monetary Responses to Oil Discoveries," Discussion Papers 1408, Centre for Macroeconomics (CFM), revised Apr 2014.
    7. Samuel Wills, 2015. "Seven Principles for Managing Resource Wealth," Economics Series Working Papers OxCarre Research Paper 15, University of Oxford, Department of Economics.
    8. Presbitero, Andrea F., 2016. "Too much and too fast? Public investment scaling-up and absorptive capacity," Journal of Development Economics, Elsevier, vol. 120(C), pages 17-31.
    9. Araujo, Juliana D. & Li, Bin Grace & Poplawski-Ribeiro, Marcos & Zanna, Luis-Felipe, 2016. "Current account norms in natural resource rich and capital scarce economies," Journal of Development Economics, Elsevier, vol. 120(C), pages 144-156.
    10. Ton S. van den Bremer & Frederick van der Ploeg, 2012. "How to Spend a Windfall: Dealing with volatility and capital scarcity," OxCarre Working Papers 085, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    11. Issouf Samaké & Priscilla S Muthoora & Bruno Versailles, 2013. "Fiscal Sustainability, Public Investment, and Growth in Natural Resource-Rich, Low-Income Countries; The Case of Cameroon," IMF Working Papers 13/144, International Monetary Fund.
    12. Samuel Wills, 2015. "Seven Principles for Managing Resource Wealth," OxCarre Working Papers 154, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.

    More about this item

    Keywords

    Optimal management of windfalls; Economic development; Capital scarcity; Public capital; PIMI; Investment adjustment costs; Absorption constraints; Genuine saving; Dutch disease; E60; F34; F35; F43; H21; H63; O11; Q33;

    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
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • 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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