Resource Rich, Capital Investment Poor

Resource-rich economies often struggle to channel export revenues into productive capital investments, despite potentially large economic and social gains. Allocating oil revenues can be particularly contentious, as policymakers must simultaneously consider how to regulate resource consumption, to manage high income volatility due to fluctuating commodity prices, and to promote sustainable economic development. A majority of oil exporting countries maintain low levels of investment, despite having high saving rates; investment levels declined from thirty percent of oil exporters’ GDP in 1970 to twenty percent during the 2000s.

Reda Cherif and Fuad Hasanov offer a method to balance saving, consumption, and investment decisions in their recent IMF report, “Oil Exporters’ Dilemma: How Much to Save and How Much to Invest.” Building on several earlier studies, the authors construct a model to analyze a country’s marginal propensity to consume a resource and suggest government policies to optimally manage resource revenue.

Cherif and Hasanov dedicate a significant portion of their report to discussing the main quantitative elements of their model. They frame resource revenue management as a maximization problem, subject to production capacity, consumer preferences, budget constraints, and the market equilibrium.

The authors compare the model’s results with current government practices and offer several conclusions. If productivity in other commodity sectors is low and income shocks are relatively predictable, the model suggests that policymakers transfer income to safe and liquid assets in order to counter consistent negative shocks. They suggest that:

[I]n general, precautionary saving should be sizable, about 30 percent of initial income.

Alternatively, if productivity is high, policymakers should allocate more revenue toward investment. Finally, the model suggests that all resource-rich countries seek to diversify their export sectors.

To sustain economic growth and lower the need for precautionary saving, the authors encourage policymakers in resource-rich countries to implement the model’s recommendations. As policymakers learn to operate more efficiently in the global economy, they can better manage and distribute the gains of oil wealth.