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The Effectiveness of Natural Resources Funds: Evidence from Colombia

Author

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  • Ome, Alejandro
  • Giles Álvarez, Laura
  • Larrahondo, Cristhian
  • Pérez, Jorge

Abstract

This study analyzes the impact of natural resource funds (NRF) on municipal fiscal results in Colombia, using an instrumental variable approach. It specifically analyzed the case of the Colombian Savings and Price Stabilization Fund (FAEP). The results suggest that a 1 percent increase in royalty revenue caused a 0.2 percent increase in gross capital formation (GCF) expenses and that this effect was cancelled out by FAEP participation. We also find that neither resource revenue windfalls nor participation in the FAEP had any impact on operating expenses nor on tax revenues, and that resource revenues have had impact on capital expenses other than GCF, but FAEP participation did not. Although we find that the NRF was indeed effective in reining in GFC expenses, the results suggest that other factors, such as subnational fiscal rules, could have had a strong effect on operating and other investment spending. Countries should thus consider a range of instruments to promote fiscal discipline and smooth out spending, including regulation and NRFs, in the face of natural resource revenue windfalls.

Suggested Citation

  • Ome, Alejandro & Giles Álvarez, Laura & Larrahondo, Cristhian & Pérez, Jorge, 2026. "The Effectiveness of Natural Resources Funds: Evidence from Colombia," IDB Publications (Working Papers) 14474, Inter-American Development Bank.
    • Handle: RePEc:idb:brikps:14474
    DOI: http://dx.doi.org/10.18235/0013913
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    JEL classification:

    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation

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