Sachs, J.D. (2007) ‘How to Handle the Macroeconomics of Oil Wealth’

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Precept 8 states that revenue volatility ought to be addressed through gradually and smoothly building up domestic expenditure and investment from resource revenues. The chapter by Sachs provides a number of insights on how to manage oil revenue, focusing upon public investment and the question of whether to save revenues for the future.

 

The chapter begins with the premise that the oil curse is not a matter of fate. Indeed, many oil rich states have tended to outperform their neighbours in terms of levels of economic performance. However, there are a number of challenges which Sachs addresses. One major challenge is that oil-producing countries often find themselves in a poverty trap due to a lack of investment by the private sector. In turn this is dependent upon the existence of core public goods, which are often lacking in developing countries. However, oil earnings can allow countries to break out of this trap.  The key recommendation made is that oil revenue in low-income countries needs to be turned into public investment and not increased private consumption. Another challenge is that of Dutch Disease, whereby the non-oil export sector is squeezed, in turn squeezing a primary source of technological development in the economy. However, Sachs finds that this fear is exaggerated and mainly a worry if oil revenue is used to finance consumption instead of investment.

 

The chapter also considers whether oil wealth ought to be saved for the future in financial assets. Consumption can be smoothed beyond oil reserves through accumulating income into a fund, spending only the earnings on financial assets. However, Sachs finds that whilst such a strategy makes sense for a country that already has extensive human and physical capital, poor countries ought to turn oil revenue into physical and human capital. 

 

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