IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/6954.html
   My bibliography  Save this paper

Harnessing Windfall Revenues in Developing Economies: Sovereign Wealth Funds and Optimal Tradeoffs Between Citizen Dividends, P

Author

Listed:
  • van der Ploeg, Frederick
  • Venables, Anthony

Abstract

A windfall of foreign aid or natural resource revenue faces government with choices of how to manage public borrowing, public asset accumulation, and the distribution of funds to households (across time and household types), particularly when the windfall is both anticipated and temporary. These choices are acute if some households do not have access to credit markets and are unable to smooth consumption, and if the country as a whole is not a price-taker in international capital markets - both reasonable descriptions of many developing countries experiencing resource (or aid) booms. We analyse the optimal policy actions for countries in this position and show that the usual permanent income hypothesis prescription of engineering a permanent increase in consumption financed by borrowing ahead of the windfall and then accumulating a Sovereign Wealth Fund (SWF) is not optimal. Heavily indebted countries with a small windfall should both increase current consumption and accumulate capital to accelerate their development. Only if the windfall is large relative to initial debt is it optimal to build a SWF. We study the intricate dynamic trade-offs faced when using the windfall to pay off debt and possibly accumulate a SWF, build public infrastructure and hand out citizen dividends. Finally, we show that a more sophisticated range of instruments (e.g., an asset holding subsidy) makes the trade-offs easier.

Suggested Citation

  • van der Ploeg, Frederick & Venables, Anthony, 2008. "Harnessing Windfall Revenues in Developing Economies: Sovereign Wealth Funds and Optimal Tradeoffs Between Citizen Dividends, P," CEPR Discussion Papers 6954, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:6954
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP6954
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
    2. Stephen J. Turnovsky, 1997. "International Macroeconomic Dynamics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262201119, December.
    3. Roel M.W.J. Beetsma & Frederick van der Ploeg, 2007. "Partisan Public Investment and Debt: The Case for Fiscal Restrictions," Economics Working Papers ECO2007/37, European University Institute.
    4. Mansoorian, Arman, 1991. "Resource Discoveries and 'Excessive' External Borrowing," Economic Journal, Royal Economic Society, vol. 101(409), pages 1497-1509, November.
    5. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    6. Harold Hotelling, 1931. "The Economics of Exhaustible Resources," Journal of Political Economy, University of Chicago Press, vol. 39(2), pages 137-137.
    7. Jeffrey D. Sachs, 1981. "The Current Account and macroeconomic Adjustment in the 1970s," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 201-282.
    8. Paul Collier & Jan Willem Gunning, 2005. "Asset Policies During an Oil Windfall: Some Simple Analytics," The World Economy, Wiley Blackwell, vol. 28(10), pages 1401-1415, October.
    9. Alberto Alesina & Guido Tabellini, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(3), pages 403-414.
    10. Mahbub Morshed, A. K. M. & Turnovsky, Stephen J., 2004. "Sectoral adjustment costs and real exchange rate dynamics in a two-sector dependent economy," Journal of International Economics, Elsevier, vol. 63(1), pages 147-177, May.
    11. Corden, W Max & Neary, J Peter, 1982. "Booming Sector and De-Industrialisation in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 92(368), pages 825-848, December.
    12. Olivier Basdevant, 2008. "Are Diamonds Forever? Using the Permanent Income Hypothesis to Analyze Botswana’s Reliance on Diamond Revenue," IMF Working Papers 2008/080, International Monetary Fund.
    13. Mr. Jan-Peter Olters, 2007. "Old Curses, New Approaches? Fiscal Benchmarks for Oil-Producing Countries in Sub-Saharan Africa," IMF Working Papers 2007/107, International Monetary Fund.
    14. Philip R. Lane & Aaron Tornell, 1999. "The Voracity Effect," American Economic Review, American Economic Association, vol. 89(1), pages 22-46, March.
    15. Mr. Jan-Peter Olters & Mr. Daniel Leigh, 2006. "Natural-Resource Depletion, Habit Formation, and Sustainable Fiscal Policy: Lessons from Gabon," IMF Working Papers 2006/193, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Rolando Ossowski & Havard Halland, 2016. "Fiscal Management in Resource-Rich Countries," World Bank Publications - Books, The World Bank Group, number 24577.
    2. Pablo Lopez Murphy & Mr. Mauricio Villafuerte & Mr. Rolando Ossowski, 2010. "Riding the Roller Coaster: Fiscal Policies of Nonrenewable Resource Exporters in Latin America and the Caribbean," IMF Working Papers 2010/251, International Monetary Fund.
    3. Salim Araji, 2018. "Natural resource revenues: Effect on the pattern of domestic investments relative to international assets investments," International Economics and Economic Policy, Springer, vol. 15(3), pages 661-682, July.
    4. Djiofack, Calvin Z. & Omgba, Luc Désiré, 2011. "Oil depletion and development in Cameroon: A critical appraisal of the permanent income hypothesis," Energy Policy, Elsevier, vol. 39(11), pages 7202-7216.
    5. Mr. S. M. Ali Abbas & Mr. Kenji Moriyama & Abdul Naseer, 2010. "Fiscal Adjustment in Sudan Size, Speed, and Composition," IMF Working Papers 2010/079, International Monetary Fund.
    6. Michaels, Guy, 2010. "Challenges for research on resource-rich economies," LSE Research Online Documents on Economics 55256, London School of Economics and Political Science, LSE Library.
    7. Mr. Paulo A Medas & Ms. Daria V Zakharova, 2009. "A Primeron Fiscal Analysis in Oil-Producing Countries," IMF Working Papers 2009/056, International Monetary Fund.
    8. Wojciech Maliszewski, 2009. "Fiscal Policy Rules for Oil-Producing Countries: A Welfare-Based Assessment," IMF Working Papers 2009/126, International Monetary Fund.
    9. Segal, Paul, 2011. "Resource Rents, Redistribution, and Halving Global Poverty: The Resource Dividend," World Development, Elsevier, vol. 39(4), pages 475-489, April.
    10. Mauricio Villafuerte & Pablo López-Murphy & Rolando Ossowski, 2011. "Riding the Roller Coaster: Fiscal Policies of Nonrenewable Resources Exporters in Latin America and the Caribbean ," Working Papers Central Bank of Chile 609, Central Bank of Chile.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Frederick van der Ploeg & Anthony J. Venables, 2011. "Harnessing Windfall Revenues: Optimal Policies for Resource‐Rich Developing Economies," Economic Journal, Royal Economic Society, vol. 121(551), pages 1-30, March.
    2. Paul Collier & Anthony Venables & Rick Van der Ploeg & Michael Spence, 2009. "Managing Resource Revenues in Developing," OxCarre Working Papers 015, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    3. van der Ploeg, Frederick & Venables, Anthony J., 2013. "Absorbing a windfall of foreign exchange: Dutch disease dynamics," Journal of Development Economics, Elsevier, vol. 103(C), pages 229-243.
    4. Amin Karimu & George Adu & George Marbuah & Justice Tei Mensah & Franklin Amuakwa-Mensah, 2017. "Natural Resource Revenues and Public Investment in Resource-rich Economies in Sub-Saharan Africa," Review of Development Economics, Wiley Blackwell, vol. 21(4), pages 107-130, November.
    5. Ohad Raveh & Yacov Tsur, 2018. "Resource Windfalls and Public Debt: The Role of Political Myopia," OxCarre Working Papers 205, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    6. Malova, Aleksandra & van der Ploeg, Frederick, 2017. "Consequences of lower oil prices and stranded assets for Russia's sustainable fiscal stance," Energy Policy, Elsevier, vol. 105(C), pages 27-40.
    7. Frederick van der Ploeg, 2011. "Natural Resources: Curse or Blessing?," Journal of Economic Literature, American Economic Association, vol. 49(2), pages 366-420, June.
    8. Sharri Byron, 2012. "Examining Foreign Aid Fungibility in Small Open Economies," Open Economies Review, Springer, vol. 23(4), pages 675-712, September.
    9. Kuralbayeva, Karlygash, 2013. "Optimal fiscal policy and different degrees of access to international capital markets," Journal of Development Economics, Elsevier, vol. 103(C), pages 336-352.
    10. Philip L. Brock, 2009. "Collateral Constraints and Macroeconomic Adjustment in an Open Economy," Working Papers UWEC-2009-03, University of Washington, Department of Economics.
    11. Panizza, Ugo & Fatás, Antonio & Ghosh, Atish R. & ,, 2019. "The Motives to Borrow," CEPR Discussion Papers 13735, C.E.P.R. Discussion Papers.
    12. Santanu Chatterjee & Stephen J. Turnovsky, 2023. "Government expenditure and informality in an emerging economy: the recent experience of India," Indian Economic Review, Springer, vol. 58(2), pages 293-318, September.
    13. Antonio Fatás & Ilian Mihov, 2010. "The Euro and Fiscal Policy," NBER Chapters, in: Europe and the Euro, pages 287-324, National Bureau of Economic Research, Inc.
    14. Djiofack, Calvin Z. & Omgba, Luc Désiré, 2011. "Oil depletion and development in Cameroon: A critical appraisal of the permanent income hypothesis," Energy Policy, Elsevier, vol. 39(11), pages 7202-7216.
    15. Sergei Guriev & Alexander Plekhanov & Konstantin Sonin, 2009. "Development Based on Commodity Revenues?," Working Papers hal-03461797, HAL.
    16. Gabriel Cuadra & Juan Sanchez & Horacio Sapriza, 2010. "Fiscal Policy and Default Risk in Emerging Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 452-469, April.
    17. Pierre JACQUET & Alexis ATLANI & Marwan LISSER, 2017. "Policy responses to terms of trade shocks," Working Papers P205, FERDI.
    18. Daniele Franco (editor), 2012. "Rules and institutions for sound fiscal policy after the crisis," Workshop and Conferences 11, Bank of Italy, Economic Research and International Relations Area.
    19. Simon Berset & Martin Huber & Mark Schelker, 2023. "The fiscal response to revenue shocks," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(3), pages 814-848, June.
    20. Araujo, Juliana D. & Li, Bin Grace & Poplawski-Ribeiro, Marcos & Zanna, Luis-Felipe, 2016. "Current account norms in natural resource rich and capital scarce economies," Journal of Development Economics, Elsevier, vol. 120(C), pages 144-156.

    More about this item

    Keywords

    Asset holding subsidy; Credit constraints; Debt management; Developing economies; Optimal fiscal policy; Private investment; Public infrastructure; Risk premium on foreign debt; Sovereign wealth fund; Windfall public revenues;
    All these keywords.

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • Q33 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Resource Booms (Dutch Disease)

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:6954. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.