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

26 Pages Posted: 20 Apr 2016

See all articles by Anton Dobronogov

Anton Dobronogov

World Bank

Octave Keutiben

University of Montreal - Department of Economics

Date Written: June 1, 2014

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 a 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.

Keywords: Economic Theory & Research, Political Economy, Debt Markets, Access to Finance, Emerging Markets

Suggested Citation

Dobronogov, Anton and Keutiben, Octave, Containing Volatility: Windfall Revenues for Resource-Rich Low-Income Countries (June 1, 2014). World Bank Policy Research Working Paper No. 6956, Available at SSRN: https://ssrn.com/abstract=2461010

Anton Dobronogov (Contact Author)

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://www.worldbank.org

Octave Keutiben

University of Montreal - Department of Economics ( email )

C.P. 6128, succursale Centre-Ville
Montreal, Quebec H3C 3J7
Canada

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