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Managing and Harnessing Volatile Oil Windfalls

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  • Van Den Bremer, Ton
  • van der Ploeg, Frederick

Abstract

Three funds are necessary to manage an oil windfall: intergenerational, liquidity and investment funds. The optimal liquidity fund is bigger if the windfall lasts longer and oil price volatility, prudence and the GDP share of oil rents are high and productivity growth is low. We apply our theory to the windfalls of Norway, Iraq and Ghana. The optimal size of Ghana’s liquidity fund is tiny even with high prudence. Norway’s liquidity fund is bigger than Ghana’s. Iraq’s liquidity fund is colossal relative to its intergenerational fund. Only with capital scarcity, part of the windfall should be used for investing to invest. We illustrate how this can speed up the process of development in Ghana despite domestic absorption constraints.

Suggested Citation

  • Van Den Bremer, Ton & van der Ploeg, Frederick, 2012. "Managing and Harnessing Volatile Oil Windfalls," CEPR Discussion Papers 9209, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9209
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    Citations

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    Cited by:

    1. van den Bremer, Ton & van der Ploeg, Frederick & Wills, Samuel, 2016. "The Elephant In The Ground: Managing Oil And Sovereign Wealth," European Economic Review, Elsevier, vol. 82(C), pages 113-131.
    2. 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.
    3. Corinne C Delechat & John W Clark JR & Pranav Gupta & Malangu Kabedi-Mbuyi & Mesmin Koulet-Vickot & Carla Macario & Toomas Orav & Manuel Rosales Torres & Rene Tapsoba & Dmitry Zhdankin & Susan S. Yang, 2015. "Harnessing Resource Wealth for Inclusive Growth in Fragile States," IMF Working Papers 15/25, International Monetary Fund.
    4. Agénor, Pierre-Richard, 2016. "Optimal fiscal management of commodity price shocks," Journal of Development Economics, Elsevier, vol. 122(C), pages 183-196.
    5. Frederick van der Ploeg & Anthony J. Venables, 2017. "Extractive revenues and government spending: Short- versus long-term considerations," WIDER Working Paper Series 045, World Institute for Development Economic Research (UNU-WIDER).
    6. 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.
    7. Stuart Landon and Constance Smith, 2015. "Rule-Based Resource Revenue Stabilization Funds: A Welfare Comparison," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    8. van den Bremer, Ton S. & van der Ploeg, Frederick, 2016. "Saving Alberta's resource revenues: Role of intergenerational and liquidity funds," Energy Policy, Elsevier, vol. 99(C), pages 132-146.
    9. Perez-Sebastian, Fidel & Raveh, Ohad, 2016. "Natural resources, decentralization, and risk sharing: Can resource booms unify nations?," Journal of Development Economics, Elsevier, vol. 121(C), pages 38-55.

    More about this item

    Keywords

    economic development; Ghana; inefficiency; intergenerational fund; Iraq; liquidity fund; Norway; oil price volatility; precautionary buffers; public investment; sovereign wealth;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development

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