Working Paper: CEPR ID: DP9209
Authors: Ton van den Bremer; Frederick van der Ploeg
Abstract: Three funds are necessary to manage an oil windfall: intergenerational, liquidity and investment funds. The optimal liquidity fund is bigger if the windfall lasts longer and oil price volatility, prudence and the GDP share of oil rents are high and productivity growth is low. We apply our theory to the windfalls of Norway, Iraq and Ghana. The optimal size of Ghana?s liquidity fund is tiny even with high prudence. Norway?s liquidity fund is bigger than Ghana?s. Iraq?s liquidity fund is colossal relative to its intergenerational fund. Only with capital scarcity, part of the windfall should be used for investing to invest. We illustrate how this can speed up the process of development in Ghana despite domestic absorption constraints.
Keywords: economic development; Ghana; inefficiency; intergenerational fund; Iraq; liquidity fund; Norway; oil price volatility; precautionary buffers; public investment; sovereign wealth
JEL Codes: D91; E21; E22; Q32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| longer-lasting windfalls (D15) | larger liquidity funds (G23) |
| higher oil price volatility (Q31) | larger liquidity funds (G23) |
| declining windfalls (H27) | prioritization of intergenerational fund (D15) |
| capital scarcity in Ghana (E22) | spending part of windfall on domestic investment (G31) |
| capital scarcity not addressed (E22) | expected growth from oil windfalls not realized (O49) |