Public Investment in Resource-Abundant Developing Countries

• Published in: IMF economic review Vol. 61; no. 1; pp. 92 - 129
• Main Authors: BERG, ANDREW, PORTILLO, RAFAEL, YANG, SHU-CHUN S., ZANNA, LUIS-FELIPE
• Format: Journal Article
• Language: English
• Published: London Palgrave Macmillan 01.04.2013; Palgrave Macmillan UK; Palgrave Macmillan Ltd. (Springer)
• Subjects: Absorptive capacity; Accounting; Capital; Capital depreciation; Capital investments; Capital Markets; Consumption; Cost control; Developing countries; E22; Economic development; Economic growth; Economic Policy; Economic resources; Economics; Economics and Finance; Efficiency; Expected utility; Expenditures; F43; Finance; Financial investments; Forecasts and trends; Government spending; Gross domestic product; International Economics; International financial institutions; Investments; LDCs; Low income groups; Macroeconomics; Macroeconomics/Monetary Economics//Financial Economics; Natural resource management; Natural resources; O41; Public capital; Public finance; Public investments; Q32; Revenue; Social investing; Sovereign wealth funds; Stochastic models; Studies; Tax increases; Angola; Q32; E22; F43; O41
• ISSN: 2041-4161; 2041-417X
• DOI: 10.1057/imfer.2013.1

Natural resource revenues provide a valuable source to finance public investment in developing countries, which frequently face borrowing constraints and tax mobilization problems. This paper develops a dynamic stochastic model to analyze the macroeconomic effects of investing resource revenues, making explicit the role of public investment inefficiency, absorptive capacity constraints, Dutch disease, and financing needs to sustain capital. Revenue exhaustibility raises medium-term issues of how to sustain capital built during a windfall, while revenue volatility raises short-term concerns about macroeconomic instability. Using the model, country applications show how combining public investment with a resource fund—a sustainable investing approach—can address the problems associated with exhaustibility and volatility. The applications also demonstrate how the model can be used to determine the appropriate magnitude of the investment scaling-up (accounting for the financing needs to sustain capital) and the adequate size of a stabilization fund (buffer).