Asset Policies During an Oil Windfall: Some Simple Analytics

15 Pages Posted: 29 Dec 2005

See all articles by Paul Collier

Paul Collier

University of Oxford - Blavatnik School of Government

Jan Willem Gunning

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Abstract

Many developing countries are currently experiencing oil windfalls, whether due to discoveries or to price effects. Such windfalls pose a series of policy dilemmas. The literature has focused on one of these: the choice between using windfall savings for public capital formation and investment in foreign assets. There are good theoretical reasons for investing a substantial part of the windfall initially abroad: the return to investment would fall below the world interest rate if the windfall were to be used entirely for domestic investment. Investing abroad offers an escape from diminishing returns: foreign assets can be repatriated gradually and used for domestic investment. However, in practice the efficient balance between domestic and foreign assets is politically difficult to sustain. Also, even if politically feasible this strategy is inefficient due to the failure to expand the private capital stock ('equipment'). The policy problem is that the government cannot undertake such investment itself and trying to induce private agents to undertake equipment investment by transferring part of the windfall to them is likely to fail as a result of information problems. We argue that domestic debt repayment solves this dilemma. It has the added advantage of making foreign asset accumulation difficult to reverse.

Suggested Citation

Collier, Paul and Gunning, Jan Willem, Asset Policies During an Oil Windfall: Some Simple Analytics. The World Economy, Vol. 28, No. 10, pp. 1401-1415, October 2005. Available at SSRN: https://ssrn.com/abstract=857828 or http://dx.doi.org/10.1111/j.1467-9701.2005.00741.x

Paul Collier (Contact Author)

University of Oxford - Blavatnik School of Government ( email )

10 Merton St
Oxford, Oxfordshire OX1 4JJ
United Kingdom

Jan Willem Gunning

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+ 310 20 444 6141 (Phone)
+ 310 20 444 6004 (Fax)

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Register to save articles to
your library

Register

Paper statistics

Downloads
25
Abstract Views
484
PlumX Metrics