Managing and Harnessing Volatile Oil Windfalls

38 Pages Posted: 1 Feb 2013

Date Written: November 2012

Abstract

Three funds are necessary to manage an oil windfall: intergenerational, liquidity and investment funds. The optimal liquidity fund is bigger if the windfall lasts longer and oil price volatility, prudence and the GDP share of oil rents are high and productivity growth is low. We apply our theory to the windfalls of Norway, Iraq and Ghana. The optimal size of Ghana’s liquidity fund is tiny even with high prudence. Norway’s liquidity fund is bigger than Ghana’s. Iraq’s liquidity fund is colossal relative to its intergenerational fund. Only with capital scarcity, part of the windfall should be used for investing to invest. We illustrate how this can speed up the process of development in Ghana despite domestic absorption constraints.

Keywords: economic development, Ghana, inefficiency, intergenerational fund, Iraq, liquidity fund, Norway, oil price volatility, precautionary buffers, public investment, sovereign wealth

JEL Classification: D91, E21, E22, Q32

Suggested Citation

Van Den Bremer, Ton and van der Ploeg, Frederick, Managing and Harnessing Volatile Oil Windfalls (November 2012). CEPR Discussion Paper No. DP9209, Available at SSRN: https://ssrn.com/abstract=2210158

Ton Van Den Bremer (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Frederick Van der Ploeg

University of Oxford ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

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