## Public Investment in Resource-Abundant Developing Countries

_IMF Working Papers, November 15, 2012_

## Source details

**Canonical URL:** [Public Investment in Resource-Abundant Developing Countries](https://www.imf.org/en/publications/wp/issues/2016/12/31/public-investment-in-resource-abundant-developing-countries-40105)

## Other formats

- [Markdown version](/en/publications/wp/issues/2016/12/31/public-investment-in-resource-abundant-developing-countries-40105/index.md)
- [Structured JSON version](/en/publications/wp/issues/2016/12/31/public-investment-in-resource-abundant-developing-countries-40105/index.json)
- [Bundle manifest](/en/publications/wp/issues/2016/12/31/public-investment-in-resource-abundant-developing-countries-40105/bundle-manifest.json)

## Bibliographic details
- Authors: Andrew Berg, Rafael A Portillo, Susan S. Yang, Luis-Felipe Zanna
- Published: November 15, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475535563.001

---

### 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.
- The paper develops a dynamic stochastic small open economy model to analyze the macroeconomic effects of investing natural resource revenues.
- The model makes explicit the role of pervasive features in these countries including:
  - public investment inefficiency,
  - absorptive capacity constraints,
  - Dutch disease,
  - financing needs to sustain capital.
- Two distinct policy challenges are highlighted:
  - Revenue exhaustibility raises medium-term issues of how to sustain capital built during a windfall.
  - Revenue volatility raises short-term concerns about macroeconomic instability.
- Combining public investment with a resource fund—a sustainable investing approach—can help address macroeconomic problems associated with both exhaustibility and volatility.

### Model, Mechanisms, and Analytical Use
- Model type: dynamic stochastic small open economy model.
- Explicit mechanisms analyzed:
  - Investment efficiency and inefficiency in public projects.
  - Absorptive capacity constraints limiting effective scaling-up.
  - Dutch disease effects from resource revenue inflows.
  - Financing needs to sustain capital once built.
- The model is applied to country cases to:
  - Determine the appropriate magnitude of investment scaling-up (accounting for financing needs to sustain capital).
  - Determine the adequate size of a stabilization fund (buffer).

### Key Findings from Country Applications
- A sustainable investing approach that combines public investment and a resource fund can mitigate:
  - Medium-term challenges due to revenue exhaustibility.
  - Short-term macroeconomic instability due to revenue volatility.
- The model provides guidance for:
  - The magnitude of investment scaling-up consistent with country-specific features.
  - The size of stabilization funds needed to buffer volatility.

### Policy Recommendations and Implications
- Use natural resource revenues to finance public investment while explicitly accounting for:
  - Investment inefficiency,
  - Absorptive capacity constraints,
  - Dutch disease risks,
  - Ongoing financing needs to sustain capital.
- Adopt a sustainable investing approach that pairs investment scaling-up with a resource/stabilization fund to address both exhaustibility and volatility.
- Use model-based analysis to tailor:
  - The scale of investment expansion,
  - The appropriate buffer (stabilization fund) size.

---

## Content in this bundle

- **Appendix I: Equilibrium and Optimality Conditions**
  - [Appendix I: Equilibrium and Optimality Conditions (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12274.pdf.md){rel="alternate" type="text/markdown"}
  - [Appendix I: Equilibrium and Optimality Conditions (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12274.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/public-investment-in-resource-abundant-developing-countries-40105_