Preprint Article Version 1 NOT YET PEER-REVIEWED

Containing Volatility: Windfall Revenues for Resource-Rich Low-Income Countries

  1. Department of Economics, Université de Moncton, Campus de Moncton, 18 avenue Antonine- Maillet, Moncton, NB, E1A 3E9, Canada
  2. World Bank, 1818 H Street, NW, Washington, DC 20433, USA
Version 1 : Received: 25 July 2016 / Approved: 29 July 2016 / Online: 29 July 2016 (07:48:51 CEST)

How to cite: Keutiben, O.; Dobronogov, A. Containing Volatility: Windfall Revenues for Resource-Rich Low-Income Countries. Preprints 2016, 2016070090 (doi: 10.20944/preprints201607.0090.v1). Keutiben, O.; Dobronogov, A. Containing Volatility: Windfall Revenues for Resource-Rich Low-Income Countries. Preprints 2016, 2016070090 (doi: 10.20944/preprints201607.0090.v1).

Abstract

An abundance of natural resources is both an opportunity and a challenge for developing countries. Several resource-rich, low-income countries receive amounts of foreign aid that are similar to or larger than their actual or potential revenues from natural resources. In such countries, the donors may have an opportunity to help a government to use its resource revenues productively and minimize the magnitude of risks created by resource rents. Development of aid instruments tailored for such purposes might be helped by model-based analysis of the effects of foreign aid on resource-rich, low-income economies and its interactions with the flows of natural resource revenues. This paper develops a growth model à la Barro in which the government receives windfalls (from natural resources and foreign aid) and rent-seeking agents contest for public funds. The key conclusion is that making aid countercyclical helps to achieve higher economic growth, and so does conditioning disbursements on enhancement of public capital. Introducing elements of insurance in the design of both aid products financing investments in infrastructure and social services and supporting policy and institutional reforms may help to achieve both of these objectives.

Subject Areas

Economic growth; Foreign aid; Natural resources; Rent-seeking; Volatility

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