Open AccessHarnessing Windfall Revenues: Optimal Policies for Resource‐Rich Developing Economies *
Author(s) -
van der Ploeg Frederick,
Venables Anthony J.
Publication year - 2011
Publication title -
the economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.683
H-Index - 160
eISSN - 1468-0297
pISSN - 0013-0133
DOI - 10.1111/j.1468-0297.2010.02411.x
Subject(s) - economics , consumption (sociology) , windfall gain , debt , revenue , natural resource , monetary economics , public capital , investment (military) , distribution (mathematics) , crowding out , private consumption , international economics , fiscal policy , macroeconomics , public investment , finance , ecology , social science , mathematical analysis , mathematics , sociology , biology , politics , political science , law
A windfall of natural resources (or aid) faces government with choices of how to manage public debt, investment and the distribution of funds for consumption. The permanent income hypothesis suggests a sustained increase in consumption supported, once resources are depleted, by interest on accumulated foreign assets. However, this strategy is not optimal for capital‐scarce developing economies. Incremental consumption should be skewed towards present generations. Savings should be directed to accumulation of domestic private and public capital rather than foreign assets. Optimal policy depends on the impact of distortionary taxation and ability of consumers to borrow against future revenues.