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Harnessing windfall revenues: Optimal policies for resource-rich developing economies

Frederick (Rick) van der Ploeg () and Anthony Venables ()

No 543, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: A windfall of natural resource revenue (or foreign aid) faces government with choices of how to manage public debt, investment, and the distribution of funds for consumption, particularly if the windfall is both anticipated and temporary. Standard policy advice follows the permanent income hypothesis in suggesting a sustained increase in consumption supported by interest on accumulated foreign assets (a Sovereign Wealth Fund) once resource revenue are exhausted. However, this strategy is not optimal for capital-scarce developing economies. Incremental consumption should be skewed towards present generations, relative to those in the far future. Savings should be directed to accumulation of domestic private and public capital rather than foreign assets. Optimal policy depends on instruments available to government. We study cases where the government can make lump-sum transfers to consumers; where such transfers are impossible so optimal policy involves cutting distortionary taxation in order to raise investment and wages; and where Ricardian consumers can borrow against future revenues so government only has indirect control of consumption.

Keywords: Natural resource; Windfall public revenues; Risk premium on foreign debt; Public infrastructure; Private investment; Credit constraints; Optimal fiscal policy; Debt management; Sovereign Wealth Fund; Asset holding subsidy; developing economies (search for similar items in EconPapers)
JEL-codes: E60 F34 F35 F43 H21 O11 Q33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev, nep-lam and nep-mac
Date: 2011-03-01
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Journal Article: Harnessing Windfall Revenues: Optimal Policies for Resource‐Rich Developing Economies (2011) Downloads
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