Resource Rents; When to Spend and How to Save

27 Pages Posted: 19 Jul 2010

See all articles by Anthony J. Venables

Anthony J. Venables

University of Oxford; Centre for Economic Policy Research (CEPR)

Date Written: June 2010

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 Classification: E2, H0, O11, Q32

Suggested Citation

Venables, Anthony J., Resource Rents; When to Spend and How to Save (June 2010). CEPR Discussion Paper No. DP7875. Available at SSRN: https://ssrn.com/abstract=1640397

Anthony J. Venables (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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