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Public Investment in Resource-Abundant Developing Countries

Author/Editor: Andrew Berg | Rafael Portillo | Shu-Chun S. Yang | Luis-Felipe Zanna
Authorized for Distribution: November 15, 2012
Electronic Access: Free Full Text (PDF file size is 917KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: Natural resource revenues provide a valuable source to finance public investment in developing countries, which frequently face borrowing constraints and tax revenue mobilization problems. This paper develops a dynamic stochastic small open economy model to analyze the macroeconomic effects of investing natural resource revenues, making explicit the role of pervasive features in these countries including 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 help address the macroeconomic problems associated with both 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).
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Series: Working Paper No. 12/274
Subject(s): Public investment | Natural resources | Revenues | Resource allocation | Development | Developing countries | Cross country analysis
    Published:   November 15, 2012        
    ISBN/ISSN:   9781475535563/1018-5941   Format:   Paper
    Stock No:   WPIEA2012274   Pages:   48
    Price:   US$18.00
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