Why Can Natural Resource Abundance Make Things Worse? - Limited Financial Development or Political Impatience?

31 Pages Posted: 11 Sep 2012

See all articles by Lavan Mahadeva

Lavan Mahadeva

Oxford Institute for Energy Studies

Date Written: September 10, 2012

Abstract

Is the failure of natural resource abundance to achieve better economic outcomes due to limited financial development or fiscal policy short-termism? I answer this question in a precautionary savings model where both resource revenues and asset returns are uncertain. Calibrating for Colombia, I find that under policy impatience, welfare costs are large, net assets are insufficient and discretionary expenditures are too sensitive to resource revenues. If financial markets are underdeveloped, we can generate welfare costs of the same magnitude but not also explain why there are insufficient net effective assets, nor the heightened sensitivity to revenues.

Keywords: optimal management of windfalls, public capital, political short-termism, financial development

JEL Classification: E44, E60, H60, Q32

Suggested Citation

Mahadeva, Lavan, Why Can Natural Resource Abundance Make Things Worse? - Limited Financial Development or Political Impatience? (September 10, 2012). Available at SSRN: https://ssrn.com/abstract=2144077 or http://dx.doi.org/10.2139/ssrn.2144077

Lavan Mahadeva (Contact Author)

Oxford Institute for Energy Studies ( email )

57 Woodstock Road
Oxford, Oxfordshire OX2 6FA
United Kingdom

HOME PAGE: http://https://sites.google.com/site/lavanmahadeva/

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