Abstract
The paper explores strategies for managing revenue from natural resources, focusing on the balance between domestic and foreign asset accumulation. It suggests that domestic asset accumulation is the priority in developing countries, while there are three motives for accumulating foreign assets; inter-generational transfer, temporary ‘parking’ of funds, and stabilisation. The paper argues that the first of these is inappropriate for low income countries. The second is required if it is difficult to absorb extra spending in the domestic economy and takes time to build up domestic investment. The third is important, and depends on the extent to which the economy has other ways of adjusting to shocks.
Highlights
Failure to save and invest a sufficiently high fraction of resource revenues is a key aspect of the poor performance of many resource rich economies
The consumption increment is front loaded, and resource revenues should be used for domestic investment and for paying off foreign debt, the domestic investment bringing forward the development path of the economy
In this paper we have addressed the two central questions of resource revenue management
Summary
Failure to save and invest a sufficiently high fraction of resource revenues is a key aspect of the poor performance of many resource rich economies. At the same time there has been a steady increase in the number of Sovereign Wealth Funds (SWFs) that have been established, many of them by resource rich economies Some of these are large and have played a useful role; others have unclear objectives and have been used with little economic logic.. This paper lays out the arguments, summarising and integrating both the micro- and macro-economic literature on resource funds and revenue management.3 Drawing on these literatures, we argue that, in capital-poor developing economies, saving rates out of resource revenues should be high, and the priority should be investment in the domestic economy. Capital scarcity motivates investment in the domestic economy; there is a sizeable opportunity cost to placing funds offshore in SWFs, and this should be done only to meet well-defined objectives.
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