Optimal Public Investment in Resource-Rich Low-Income Countries
Optimal Public Investment in Resource-Rich Low-Income Countries
Recent studies have found that resource-rich low-income countries are better off investing their resource revenues domestically rather than saving them abroad in a sovereign wealth fund (SWF). This paper finds an optimal rule-based policy of accumulating public capital and its associated public investment path in a perfect foresight general equilibrium model. The model has several specific features different from the existing frameworks: the policy rule for public capital is introduced. Public investment is inefficient and has its absorptive capacity constraint costs. External savings clear the government budget. There is a variable share of resource revenues to accumulate the SWF, and the natural resource sector is assumed to be capital-intensive with its foreign direct investment shock. Based on calibration for African countries, the study finds that the front-loaded public investment path is optimal given an initial one-period resource windfall, public investment inefficiency and absorptive capacity constraints in the economies. This result also holds under less productive public capital and more patient households, while a scenario of no resource windfall produces the welfare loss due to a steady increase in consumption tax to finance public investment.
CITATION: Algozhina, Aliya. Optimal Public Investment in Resource-Rich Low-Income Countries . : Oxford University Press , 2022. Journal of African Economies, Vol. 31, No. 1, January 2022 pp. 75-93 - Available at: https://library.au.int/froptimal-public-investment-resource-rich-low-income-countries