Public finance, oil revenue expenditure and economic performance: a comparative study of four countries

Abstract

The literature of resource-based development has widely discussed the impacts of oil revenues on the economic structure of oil-exporting countries. However, in addition to economic structure, oil revenues have a substantial impact on the growth and sustainability of the public sector in oil-exporting countries, which has not been discussed. This paper develops a system dynamics model to analyze the dynamics of government financial structure and public services in the course of development based on oil revenues. In oil-exporting countries, governments use their oil revenues to finance development projects and pay for a major part of operating and maintenance cost of public services. Development budget accumulates new capacity for public services and infrastructure. As public services capacity increases so does the required recurrent budget to pay for the operating and maintenance cost. The governments would need more oil revenues to sustain the growth of public sector and to pay for the growing recurrent budget. However, oil revenues cannot grow for ever. Limitation from market demand or oil reserves would restrict continuous growth of oil revenues. Oil revenues stop growing and eventually will fall. Decline of oil revenues would create a financial crisis for the public sector of oil-exporting countries. The development budget will fall below depreciation and public-sector capacity will drop. The paper also considers investment in public enterprises as another use of oil revenues. Since these enterprises do not usually produce a return, such investment will not impact the collapse of the public sector. The paper concludes with some policy recommendations for increasing the chance of sustainability of the public sector in oil-exporting countries. © 1998 John Wiley & Sons, Ltd.