Working Paper: CEPR ID: DP7875
Authors: Anthony J. Venables
Abstract: Countries with substantial revenues from renewable resources face a complex range of revenue management issues. What is the optimal time profile of consumption from the revenue, and how much should be saved? Should saving be invested in foreign funds or in the domestic economy? How does government policy influence the private sector, where sustainable growth in the domestic economy must ultimately be generated? This paper develops the issues in a simple two-period model, and argues that analysis must go well beyond the simple permanent income approach sometimes recommended. In developing countries resource revenues relax constraints on the supplies of capital and of government funds. The level of saving should be somewhat lower than under the permanent income hypothesis because of the low income of the current generation. The composition of investment should be tilted to the domestic economy rather than foreign assets. Government prudence can be undermined by private sector expectations, so high levels of spending on public infrastructure may be appropriate as a commitment to invest.
Keywords: Natural Resources; Permanent Income; Resource Curse; Revenue Management
JEL Codes: E2; H0; O11; Q32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| resource revenues (Q33) | relax constraints on capital and government funds (H54) |
| relax constraints on capital and government funds (H54) | lower optimal saving level compared to the PIH (D14) |
| low income of the current generation (I32) | lower optimal saving level compared to the PIH (D14) |
| lower optimal saving level compared to the PIH (D14) | tilt in investment towards the domestic economy (F21) |
| government spending on public infrastructure (H54) | stimulate the economy (E65) |
| resource wealth (Q37) | reduce cost of capital for the private sector (O16) |
| reduce cost of capital for the private sector (O16) | increase private investment (E22) |
| increase private investment (E22) | capital deepening (E22) |
| resource revenues (Q33) | increase present consumption (E21) |
| resource revenues (Q33) | invest in public and human capital (H54) |
| time profile of consumption and saving (E21) | differ significantly from the PIH (I14) |
| composition of saving (D14) | differ significantly from the PIH (I14) |