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A Simple Model of Internal and External Balance for Resource-Rich Developing Countries

Author

Listed:
  • Martin Davies

    (Washington and Lee University)

  • Marcel Schröder

    (Asian Development Bank)

Abstract

We present a simple model of internal and external balance that incorporates the key features of resource-rich developing countries (RRDCs). The main result is that “government take", which is the ratio of fiscal resource revenue to resource output, is a key determinant of the equilibrium real exchange rate (RER) in RRDCs. In examining the case of Papua New Guinea, which has grappled with foreign exchange restrictions since 2015, we find that about half of the RER overvaluation estimated at 26% in 2019 would disappear if the current low level of government take was to be lifted to its long-term average. The analysis has two key takeaways for RRDCs. First, changes in the government take require adjustments to the RER and fiscal policy to maintain internal and external balance. Second, economic adjustments to falls in the take are difficult; therefore policies that seek to stabilize the take over time to promote macroeconomic stability are recommended.

Suggested Citation

  • Martin Davies & Marcel Schröder, 2022. "A Simple Model of Internal and External Balance for Resource-Rich Developing Countries," ADB Economics Working Paper Series 660, Asian Development Bank.
    • Handle: RePEc:ris:adbewp:0660
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    References listed on IDEAS

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    1. Anthony J. Venables, 2016. "Using Natural Resources for Development: Why Has It Proven So Difficult?," Journal of Economic Perspectives, American Economic Association, vol. 30(1), pages 161-184, Winter.
    2. Frederick van der Ploeg, 2011. "Natural Resources: Curse or Blessing?," Journal of Economic Literature, American Economic Association, vol. 49(2), pages 366-420, June.
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    Keywords

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • Q33 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Resource Booms (Dutch Disease)
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)

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