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We are grateful to Andrew Berg, Martin Cerisola, Kamil Dybczak, Luc Moers, Catherine Pattillo, and participants in the 2013 CSAE conference at the University of Oxford for comments and suggestions. This working paper is part of a research project on macroeconomic policy in low-income countries supported by U.K.’s Department for International Development (DFID). This working paper should not be reported as representing the views of the IMF or of DFID. The views expressed in this Working Paper are those of the authors and do not necessarily represent those of the IMF or IMF policy, or of DFID. Working Papers describe research in progress by the authors and are published to elicit comments and to further debate.
Sachs and Warner (1995) show that resource rich countries grow on average one percent less during the period of 1970-89 after controlling for initial income per capita, investment, openness and rule of law. In spite of many later studies supporting the existence of a natural resource curse (Sachs and Warner, 1995, 1999; van der Ploeg and Poelhekke, 2009), the empirical literature that followed pointed to mixed results, suggesting also the possibility of a natural resource “blessing” (van der Ploeg, 2011b).
Eaton (2002) and Hjertholm’s (2003) have raised concerns that IMF-WB’s debt projections are not derived from an integrated, internally consistent macroeconomic framework. For instance they generally do not make an explicit linkage between the public investment that the proposed nonconcessional borrowing is meant to finance and the resulting growth that should make the operation self-financing. This inflates debt indicators, such as debt-to-GDP ratios, creates a bias toward conservative borrowing limits, and can amount “to sacrificing growth to imprecisely known debt sustainability risks” (Wyplosz, 2007).
The Buffie et al. model has been used to complement the IMF-WB DSF. It has been applied to several countries including Burkina Faso, Cape Verde, Côte d’Ivoire, Ghana, Liberia, Rwanda, Senegal, and Togo.
Different from Berg et al. (2013), where the saving rate of a resource windfall into a resource fund is constant and transfers adjust to satisfy the government budget constraint, the resource fund in DIGNAR can maintain a stable fiscal regime, in which government consumption, tax rates, and transfers do not have to adjust to maintain fiscal sustainability while scaling up public investment.
To see the role of this feature in practice see the model application to Kazakhstan in Minasyan and Yang (2013).
The nominal side and New Keynesian features may be added if the model is used to study the short-run policy effects of fiscal management to resource revenue flows.
Because of the common wedge between tax burden imposed and tax revenues accrued to the government in developing countries, we assume that a fraction ϑK of the tax revenue related to capital income does not enter the government budget constraint. Introducing this wedge also allows us to match the observed initial low private investment flows observed in most LICs.
These adjustment costs also ensure stationarity in this small open economy model, as discussed in Schmitt-Grohe and Uribe (2003).
Adam and Bevan (2013) find that accounting for the operations and maintenance expenditures of installed capital is crucial for assessing the growth effects and debt sustainability of a public investment scaling-up.
To guarantee that the resource fund is not an explosive process, we assume that in the very long run, a small autoregressive coefficient ρf ∈ (0,1) is attached to
The model allows for a flexible arrangements of using various fiscal instruments—the consumption and labor tax rates, government consumption, and transfers to households—to maintain debt sustainability. The analysis presented here uses only the consumption tax rate as an example.
Our simulation results appear to favor external commercial borrowing to domestic borrowing, mainly due to the reduced crowing-out effect with external borrowing. Since the model only accounts for shocks to resource prices and quantity, it does not capture the increased vulnerability from a higher stock of external debt resulting from other economic shocks. For example, an unexpected shock that depreciates the real exchange rate would expand the size of foreign liabilities, threatening debt sustainability, as the negative terms-of-trade shock analyzed in Buffie et al. (2012).
Work at the research department of the Fund is attempting to incorporate uncertainty about shocks and parameters more systematically in the debt sustainability model by Buffie et al. (2012), while maintaining the non-linear structure, to construct confidence bands around debt trajectories. A similar approach could in principle be taken for DIGNAR.