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

  • AREZKI Rabah
  • DUPUY Arnaud
  • GELB Alan

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.

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Paper provided by LISER in its series LISER Working Paper Series with number 2013-12.

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Length: 36 pages
Date of creation: Jun 2013
Date of revision:
Handle: RePEc:irs:cepswp:2013-12
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  1. Frankel, Jeffrey A., 2012. "The Natural Resource Curse: A Survey of Diagnoses and Some Prescriptions," Working Paper Series rwp12-014, Harvard University, John F. Kennedy School of Government.
  2. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output Per Worker Than Others?," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 83-116, February.
  3. Alan Gelb & Caroline Decker, 2012. "Cash at Your Fingertips: Biometric Technology for Transfers in Developing Countries," Review of Policy Research, Policy Studies Organization, vol. 29(1), pages 91-117, 01.
  4. Sebnem Kalemli-Ozcan & Laura Alfaro & Vadym Volosovych, 2003. "Why doesn’t Capital Flow from Rich to Poor Countries? An Empirical Investigation," Working Papers 2003-01, Department of Economics, University of Houston.
  5. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, vol. 91(5), pages 1369-1401, December.
  6. Frederick Van der Ploeg, 2010. "Natural Resources: Curse or Blessing?," CESifo Working Paper Series 3125, CESifo Group Munich.
  7. Michael A. Clemens, 2011. "Economics and Emigration: Trillion-Dollar Bills on the Sidewalk?," Journal of Economic Perspectives, American Economic Association, vol. 25(3), pages 83-106, Summer.
  8. Zac Mills & Annette Kyobe & Jim Brumby & Chris Papageorgiou & Era Dabla-Norris, 2011. "Investing in Public Investment; An Index of Public Investment Efficiency," IMF Working Papers 11/37, International Monetary Fund.
  9. Kazim Kazimov & Kirk Hamilton & Rabah Arezki, 2011. "Resource Windfalls, Macroeconomic Stability and Growth; The Role of Political Institutions," IMF Working Papers 11/142, International Monetary Fund.
  10. Daron Acemoglu & Simon Johnson, 2003. "Unbundling Institutions," NBER Working Papers 9934, National Bureau of Economic Research, Inc.
  11. Marito Garcia & Charity M. T. Moore, 2012. "The Cash Dividend : The Rise of Cash Transfer Programs in Sub-Saharan Africa," World Bank Publications, The World Bank, number 2246.
  12. Todd Moss, 2011. "Oil to Cash: Fighting the Resource Curse through Cash Transfers," Working Papers id:3489, eSocialSciences.
  13. Steven Barnett & Rolando Ossowski, 2002. "Operational Aspects of Fiscal Policy in Oil-Producing Countries," IMF Working Papers 02/177, International Monetary Fund.
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