## Are Developing Countries Better Off Spending Their Oil Wealth Upfront?

_IMF Working Papers, August 1, 2004_

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## Bibliographic details
- Authors: H. Takizawa, E. H. Gardner, Kenichi Ueda
- Published: August 1, 2004
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451856217.001

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### Summary and main findings
- The paper questions the conventional view that it is optimal for government to maintain a stable level of spending out of oil wealth.
- It compares the conventional policy recommendation with a policy where government spends all of its oil revenues upfront, at the same rate as oil is extracted.
- Using a neoclassical growth model with positive external effects of public spending on consumption and productivity, the authors find:
  - If the economy is growing along the steady-state balanced path, the conventional view is validated.
  - If the economy starts with a lower capital stock, the welfare ranking across the two policies can be reversed.

### Methodology
- Model type: neoclassical growth model.
- Key model feature: positive external effects of public spending on consumption and productivity.
- Policy scenarios compared:
  - Conventional policy: maintain a stable level of spending out of oil wealth (annuity policy).
  - Upfront-spending policy: spend all oil revenues upfront, at the same rate as oil is extracted.

### Policy implications and interpretation
- The optimality of maintaining stable spending out of oil wealth depends on the initial capital stock and the economy’s position relative to the steady-state balanced path.
- For economies on the steady-state balanced path, policymakers are supported in following the conventional annuity/stable-spending approach.
- For economies with a lower initial capital stock, spending oil revenues upfront can produce a superior welfare outcome according to the model’s results.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/are-developing-countries-better-off-spending-their-oil-wealth-upfront-17524_