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Are Developing Countries Better off Spending their Oil Wealth Upfront?

  • H. Takizawa
  • E. H. Gardner
  • Kenichi Ueda

We question the conventional view that it is optimal for government to maintain a stable level of spending out of oil wealth. We compare this conventional policy recommendation with one where government spends all of its oil revenues upfront, at the same rate as oil is extracted. Using a neoclassical growth model with positive external effects of public spending on consumption and productivity, we find that, if the economy is growing along the steady-state balanced path, the conventional view is validated. However, if the economy starts with a lower capital stock, the welfare ranking across two policies can be reversed.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/141.

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Length: 29
Date of creation: 01 Aug 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/141
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  1. Kneller, Richard & Bleaney, Michael F. & Gemmell, Norman, 1999. "Fiscal policy and growth: evidence from OECD countries," Journal of Public Economics, Elsevier, vol. 74(2), pages 171-190, November.
  2. Paul Cashin, 1994. "Government Spending, Taxes, and Economic Growth," IMF Working Papers 94/92, International Monetary Fund.
  3. Nigel James Miller & Christopher Tsoukis, 2001. "On the optimality of public capital for long-run economic growth: evidence from panel data," Applied Economics, Taylor & Francis Journals, vol. 33(9), pages 1117-1129.
  4. Khan, Mohsin S & Kumar, Manmohan S, 1997. "Public and Private Investment and the Growth Process in Developing Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(1), pages 69-88, February.
  5. Clark A. Burdick, 1997. "A transitional analysis of the welfare cost of inflation," Working Paper 97-15, Federal Reserve Bank of Atlanta.
  6. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
  7. Reinhart, Carmen & Khan, Mohsin, 1989. "Private investment and economic growth in developing countries," MPRA Paper 13655, University Library of Munich, Germany.
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