DP9209 Managing and Harnessing Volatile Oil Windfalls

Author(s): Ton Van Den Bremer , Frederick van der Ploeg

Publication Date: November 2012

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

JEL(s): D91 , E21 , E22 , Q32

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP9209.asp

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.