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

Martin Davies () and Marcel Schröder ()
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Martin Davies: Washington and Lee University
Marcel Schröder: Asian Development Bank

No 660, ADB Economics Working Paper Series from 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.

Keywords: government take; internal and external balance; real exchange rate; resource-rich developing countries; resource taxation (search for similar items in EconPapers)
JEL-codes: F31 O11 Q32 Q33 Q38 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2022-05-26
New Economics Papers: this item is included in nep-opm
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