Savings from Natural Resource Revenues in Developing Countries: Principles and Policy Rules

Paul Collier

Revue d’économie du développement, 2014, vol. 22, issue HS01, 185-216

Abstract: Many poor countries are now discovering valuable non-renewable natural resources. Unlike most other sources of tax revenue, the government revenues from the depletion of these resources are both unsustainable and volatile. Each of these features implies that the savings rate appropriate for resource revenues should differ from that on other revenues. Further, a discovery is ?news?, requiring a transition from a situation which has suddenly become sub-optimal. Such transitions must be expected to generate costs which will themselves affect the optimal savings rate. While the features themselves have long been well-understood, the implications for optimal savings behaviour are surprisingly underdeveloped. A fortiori, the implications for the rules which might be the practical embodiment of these analytic underpinnings are also underdeveloped. Our analysis proceeds in four stages. In Section 1 we discuss how savings should optimally respond to the known depletion path of a finite natural resource. In Section 2 we discuss revenue volatility in the context of costly adjustments in spending. In Section 3 we discuss the implications of costs of transition. Finally, in Section 4 we discuss the implications for fiscal rules and institutions. We argue that where revenues from depleting resources are significant, fiscal optimization requires that the intra-temporal rules conventionally incorporated into annual budgeting be supplemented by inter-temporal rules. Such rules protect the efficient fiscal allocation which in conventional circumstances integrated budgets are designed to achieve.

Date: 2014
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