Non-Renewable Resources, Fiscal Rules, and Human Capital

39 Pages Posted: 19 Jul 2016

See all articles by Paul Levine

Paul Levine

School of Economics, University of Surrey

Giovanni Melina

International Monetary Fund (IMF)

Harun Onder

World Bank

Date Written: June 6, 2016

Abstract

This paper develops a multi-sector, small open economy Dynamic Stochastic General Equilibrium model, which includes the accumulation of human capital, built via public expenditures in education and health. Four possible fiscal rules are examined for total public investment in infrastructure, education, and health in the context of a sustainable resource fund: the spend-as-you-go, bird-in-hand spending; moderate front-loading, and permanent income hypothesis approaches. There are two dimensions to this exercise: the scaling effect, which describes the level of total investment, and the composition effect, which defines the structure of investment between infrastructure, education, and health. The model is applied to Kenya. For impacts on the non-resource economy, efficiency of spending, and sustainability of fiscal outcomes, the analysis finds that, although investment frontloading would bring high growth in the short term, the permanent income hypothesis approach is overall more desirable when fiscal sustainability concerns are taken into consideration. Finally, a balanced composition is the preferred structure of investment, given the permanent income hypothesis allocation of total investment over time.

Keywords: Capital Flows, Public Finance Decentralization and Poverty Reduction, Non Bank Financial Institutions, Economic Adjustment and Lending, Public Sector Economics, Capital Markets and Capital Flows, Macro-Fiscal Policy

Suggested Citation

Levine, Paul L. and Melina, Giovanni and Onder, Harun, Non-Renewable Resources, Fiscal Rules, and Human Capital (June 6, 2016). World Bank Policy Research Working Paper No. 7695. Available at SSRN: https://ssrn.com/abstract=2811342

Paul L. Levine (Contact Author)

School of Economics, University of Surrey ( email )

Guildford
Surrey GU2 7XH
United Kingdom
+44 1483 259 380 Ext. 2773 (Phone)
+44 1483 259 548 (Fax)

Giovanni Melina

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Harun Onder

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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