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Resource Windfalls, Optimal Public Investment and Redistribution; The Role of Total Factor Productivity and Administrative Capacity

Author

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  • Alan H. Gelb
  • Arnaud Dupuy
  • Rabah Arezki

Abstract

This paper studies the optimal public investment decisions in countries experiencing a resource windfall. To do so, we use an augmented version of the Permanent Income framework with public investment faced with adjustment costs capturing the associated administrative capacity as well as government direct transfers. A key assumption is that those adjustment costs rise with the size of the resource windfall. The main results from the analytical model are threefold. First, a larger resource windfall commands a lower level of public capital but a higher level of redistribution through transfers. Second, weaker administrative capacity lowers the increase in optimal public capital following a resource windfall. Third, higher total factor productivity in the non-resource sector reduces the degree of des-investment in public capital commanded by weaker administrative capacity. We further extend our basic model to allow for "investing in investing" - that is public investment in administrative capacity - by endogenizing the adjustment cost in public investment. Results from the numerical simulations suggest, among other things, that a higher initial stock of public administrative "know how" leads to a higher level of optimal public investment following a resource windfall. Implications for policy are discussed.

Suggested Citation

  • Alan H. Gelb & Arnaud Dupuy & Rabah Arezki, 2012. "Resource Windfalls, Optimal Public Investment and Redistribution; The Role of Total Factor Productivity and Administrative Capacity," IMF Working Papers 12/200, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:12/200
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    References listed on IDEAS

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    Cited by:

    1. Shantayanan Devarajan & Marcelo Giugale, 2013. "The Case for Direct Transfers of Resource Revenues in Africa - Working Paper 333," Working Papers 333, Center for Global Development.
    2. Go, Delfin S. & Robinson, Sherman & Thierfelder, Karen & Utz, Robert, 2013. "Dutch disease and spending strategies in a resource-rich low-income country -- the case of Niger," Policy Research Working Paper Series 6691, The World Bank.
    3. Dobronogov, Anton & Gelb, Alan & Saldanha, Fernando Brant, 2014. "How should donors respond to resource windfalls in poor countries ? from aid to insurance," Policy Research Working Paper Series 6952, The World Bank.
    4. 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.
    5. Cavalcanti, Carlos B. & Marrero, Gustavo A. & Le, Tuan Minh, 2014. "Measuring the impact of debt-financed public investment," Policy Research Working Paper Series 6766, The World Bank.
    6. Rabah Arezki & Herbert Lui & Marc G Quintyn & Frederik G Toscani, 2012. "Education Attainment in Public Administration Around the World; Evidence from a New Dataset," IMF Working Papers 12/231, International Monetary Fund.

    More about this item

    Keywords

    Economic models; Public investment; Revenues; Resource allocation; Natural resources; Total factor productivity; Resource Windfall; Administrative Capacity; capital investment; investment management; investor protection; public investment programs; Macroeconomic Policy; Macroeconomic Aspects of Public Finance; and General Outlook: General; International Lending and Debt Problems;

    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
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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