^*Paul Collier, Rick van der Ploeg, and Anthony J. Venables are professors of economics at the University of Oxford. Michael Spence is a professor of economics at Stanford University and a Nobel Laureate in Economics. This paper was supported by the BP funded Oxford Centre for the Analysis of Resource Rich Economies and by the Centre for the Study of African Economies. The authors thank Rolando Ossowski for sharing his data on fiscal policies and hydrocarbon revenues with us, and thank Nicolas van de Sijpe for his able research assistance.

Abstract

This paper addresses the efficient management of natural resource revenues in capital-scarce developing economies. It departs from usual prescriptions based on the permanent income hypothesis and argues that capital-scarce countries should prioritize domestic investment. Because revenue streams are highly volatile, governments should protect consumption from shocks by increasing it only cautiously. Volatility in domestic investment can be moderated by a buffer of international liquidity, but it is also important to structure investment processes to be able to cope efficiently with substantial fluctuations. To date, most of the resource-rich countries of Africa have not had investment rates commensurate with their rate of resource extraction.