Skip to main content

Oil revenues for public investment in Africa: targeting urban or rural areas?

Abstract

This paper investigates the effects of oil-financed public investment on economic growth and poverty reduction using a dynamic multi-sectoral general equilibrium model featuring inter-temporal productivity spillovers. The paper shows that the relationship between resource-rent flows and real exchange rates, output growth, and poverty is less straightforward than simple models of the “resource curse” suggest. Taking Ghana as a stylized agriculture-based economy with poverty most pronounced in a region with home based agricultural production, a policy mix of smoothing the real exchange rate shock and an allocation of infrastructure spending in rural areas seems to be the most promising public investment strategy to enhance growth and reduce poverty.

This is a preview of subscription content, access via your institution.

Fig. 1
Fig. 2
Fig. 3
Fig. 4

Notes

  1. Windfall income or the expectations of such income generated by a discovery of natural resources might induce the country to neglect the need for sound economic management and institutional quality (Gylfason 2001). A false sense of security might lead governments to undervalue the importance of human capital, institutional quality and long-run growth (Rodriguez and Sachs 1999; Sachs and Warner 2001). In addition, adverse results may be the effect of an interplay of rent-seeking groups and weak institutions (Auty 2000).

  2. Recent publications present evidence that natural resources diminish the need for investment and savings because of the expected future income (Gylfason and Zoega 2006). Hence, at least part of the windfalls will be consumed and expectations about additional economic growth driven by the full extent of the windfall spend for investment may be exaggerated (see, e.g., Sachs and Warner 1997; Edwards 1989; Brunstad and Dyrstad 1997; Bjørnland 1998; Hutchinson 1994; Usui 1997 and Jahan-Parvar and Mohammadi 2009).

  3. A comprehensive survey of this literature is provided by Gramlich (1994) and Straub (2008).

  4. Tables 4 and 5 in the “Appendix” provide some indicators on the export orientation of individual sectors and the import dependence of domestic demand, together with information on sectoral and regional production, employment and cost structure. Besides mining, cocoa, forestry and livestock are the most export oriented sectors, exporting between 25 and 85% of their production, with the bulk of export production stemming from agro-ecological zones 1–3 while the poor zone 4 (Northern savanna) is producing almost exclusively for the domestic market.

  5. Recently Rutherford et al. (2004), have constructed a model for Russia that endogenously includes over 55,000 households.

  6. For each simulation, the impact effect (years 2008–2010) and the evolution of the economy until years 2015, 2020, and 2027 are reported. To simplify the presentation, the focus is on changes in only a small number of key aggregates: the trade weighted real exchange rate, the volume of exports, real GDP, private investment, the fiscal balance, the aggregated sectoral real value added, rural and urban household welfare measured by the equivalent variation (Table 1) and the incidence of poverty (poverty headcount; Table 2). Tables 6, 7, 8 in the "Appendix" report on the disaggregated factor income distribution, poverty depth, and poverty severety.

  7. For a similar result in the case of home driven productivity increases, see, e.g. Adam and Bevan (2006).

  8. For details, see Breisinger et al. (2009). The simulations neglect the phasing in and out of the actually expected stream of Government revenue, which consists of two successive temporary increases in foreign exchange revenues to the government, yielding 4 years of peak revenue, to be followed by a continues decline of revenue afterwards (World Bank 2009b).

  9. Government revenue grows as real incomes and expenditures grow while, after the initial step changes in year 2010, real government spending does not. Savings available for private investment grow partly with GDP but also because of crowding-in from the improvement in the fiscal balance. It is a consequence of the closure rule mentioned earlier that these resources are duly invested.

  10. Scenarios OIL4 and OIL5 assume the same infrastructure spending pattern as scenario OIL3.

References

  • Adam, C., & Bevan, D. (2006). Aid and the supply side: Public investment, export performance, and Dutch disease in low-income countries. The World Bank Economic Review, 20(2), 261–290.

    Article  Google Scholar 

  • Adelman, I., & Robinson, S. (1978). Income distribution policy in developing countries: A case study of Korea. Stanford University Press: World Bank Research Publication.

    Google Scholar 

  • Ahmed, R., & Hossain, M. (1990). Developmental impact of rural infrastructure in Bangladesh. (IFPRI research report no. 83). Washington, DC: International Food Policy Research Institute.

  • Antle, J. (1984). Human capital, infrastructure, and the productivity of Indian rice farmers. Journal of Development Economics, 14(1), 163–181.

    Article  Google Scholar 

  • Aschauer, D. (1989). Is public expenditure productive? Journal of Monetary Economics, 23, 177–200.

    Article  Google Scholar 

  • Auty, R. (2000). How natural resources affect economic development. Development Policy Review, 18(4), 347–364.

    Article  Google Scholar 

  • Benin, S., Mogues, T., Cudjoe, G., & Randriamamonjy, J. (2008). Reaching middle-income status in Ghana by 2015. (IFPRI Discussion Paper 811). Washington, DC: International Food Policy Research Institute.

  • Binswanger, H. P., Khandker, S. R., & Rosenzweig, M. R. (1993). How infrastructure and financial institutions affect agricultural output and investment in India. Journal of Development Economics, 41(2), 337–366.

    Article  Google Scholar 

  • Bjørnland, H. (1998). The economic effects of North Sea oil on the manufacturing sector. Scottish Journal of Political Economy, 45(5), 553–585.

    Article  Google Scholar 

  • Breisinger, C., & Diao, X. (2009). Economic transformation in theory and practice: What are the messages for Africa? (IFPRI Discussion Paper 797). Washington, DC: International Food Policy Research Institute.

  • Breisinger, C., Diao, X., Schweickert, R., & Wiebelt, M. (2009). Managing future oil revenues in GhanaAn assessment of alternative allocation options. (IFPRI Discussion Paper 893). Washington, DC: International Food Policy Research Institute.

  • Brunstad, R., & Dyrstad, J. (1997). Booming sector and wage effects: An empirical analysis on Norwegian data. Oxford Economic Papers, 49(1), 89–103.

    Google Scholar 

  • Calderón, C., & Servén, L. (2004). The effects of infrastructure development on growth and income distribution. (World Bank Policy research working paper WPS3400). Washington, DC: World Bank.

  • Calderón, C., & Servén, L. (2008). Infrastructure and economic development in Sub-Saharan Africa. (Policy research working paper WPS4712). Washington, DC: World Bank.

  • Canning, D. (1999). Infrastructure’s contribution to aggregate output. (Policy research working paper WPS2246). Washington, DC:World Bank.

  • Canning, D., & Bennathan, E. (2000). The social rate of return on infrastructure investments. (Policy research working paper WPS2390). Washington, DC: World Bank.

  • Collier, P. (2006). African growth: Why a big push? Journal of African Economies, 15(Supplement 2), 188–211.

    Google Scholar 

  • Davis, G. A. (1995). Learning to love the Dutch disease: Evidence from the mineral economies. World Development, 23(10), 1765–1779.

    Article  Google Scholar 

  • Dorosh, P., & Thurlow, J. (2009). Agglomeration, migration, and regional growth. A CGE analysis for Uganda. (IFPRI discussion paper 848). Washington, DC: International Food Policy Research Institute.

  • Duflo, E., & Pande, R. (2007). Dams. Quarterly Journal of Economics, 122(2), 601–646.

    Article  Google Scholar 

  • Edwards, S. (1989). Commodity export boom and the real exchange rate: The money-inflation link. (NBER working papers, W1741). Cambridge, MA: National Bureau of Economic Research.

  • Esfahani, H., & Ramirez, M. T. (2002). Institutions, Infrastructure and Economic Growth. Journal of Development Economics, 70, 443–477.

    Article  Google Scholar 

  • Fan, S., & Zhang, X. (2008). Public expenditure, growth, and poverty reduction in rural Uganda. African Development Review, 20(3), 466–496.

    Article  Google Scholar 

  • Fan, S., Hazell, P., & Thorat, S. (2000). Government spending, growth, and poverty in rural India. American Journal of Agricultural Economics, 82(4), 1038–1051.

    Article  Google Scholar 

  • Fan, S., Nyange, D., & Rao, N. (2005). Public investment and poverty reduction in Tanzania: Evidence from household survey data. (DSGD Discussion Paper 18). Washington, DC: International Food Policy Research Institute.

  • Fan, S., Zhang L., & Zhang, X. (2003). Growth, inequality, and poverty in rural China: The role of public investments. (Research report 125). Washington, DC: International Food Policy Research Institute.

  • Gibson, J., & Rozelle, S. (2004). Poverty and access to roads in Papua New Guinea. Economic Development and Cultural Change, 52(1), 159–185.

    Google Scholar 

  • Gramlich, E. M. (1994). Infrastructure investment: A review essay. Journal of Economic Literature, 32(September), 1176–1196.

    Google Scholar 

  • GSS. (2008). Ghana living standards survey round 5 (GLSS5). Accra: Ghana Statistical Survey.

    Google Scholar 

  • Gylfason, T. (2001). Natural resources, education, and economic development. European Economic Review, 45(4–6), 847–859.

    Article  Google Scholar 

  • Gylfason, T., & Zoega, G. (2006). Natural resources and economic growth: The role of investment. The World Economy, 29(8), 1091–1115.

    Article  Google Scholar 

  • Hood, R., Husband, D., & Yu, F. (2002). Recurrent expenditure requirements of capital projects . (Policy research working paper WPS2938). Washington, DC: World Bank.

  • Hulten, C. (1996). Infrastructure capital and economic growth: How well you use it may be more important than how much you have. (NBER working paper 5847). Cambridge, MA: National Bureau of Economic Research.

  • Hutchinson, M. (1994). Manufacturing sector resiliency to energy booms: Empirical evidence from Norway, the Netherlands, and the United Kingdom. Oxford Economic Papers, 46(2), 311–329.

    Google Scholar 

  • IMF (2009). Ghana—Country report no. 09/256. Washington, DC: International Monetary Fund.

  • Jacoby, H. (2000). Access to rural markets and the benefits of rural roads. The Economic Journal, 110, 713–737.

    Article  Google Scholar 

  • Jahan-Parvar, M., & Mohammadi, H. (2009). Oil prices and competitiveness: Time series evidence from six oil-producing countries. Journal of Economic Studies, 36(1), 98–118.

    Article  Google Scholar 

  • King, R., & Byerlee, D. (1978). Factor intensities and locational linkages of rural consumption patterns in Sierra Leone. American Journal of Agricultural Economics, 60(2), 197–206.

    Article  Google Scholar 

  • Lederman, D., & Maloney, W. (2003). Trade structure and growth. (Policy research working paper WPS3025). Washington, DC: World Bank.

  • Lin, J. (2010). New structural economics. A framework for rethinking development . (Policy research working paper WPS5197). Washington, DC: World Bank.

  • Osei, R. D., & Domfe, G. (2008). Oil production in Ghana: Implications for economic development ARI 104/2008. Accra: Institute of Statistical Social and Economic Research, University of Ghana.

  • Ram, R. (1996). Productivity of public and private investment in developing countries: A broad international perspective. World Development, 24(8), 1373–1378.

    Article  Google Scholar 

  • Reinikka, E., & Svensson, J. (2002). Coping with poor public capital. Journal of Development Economics, 69(1), 51–69.

    Article  Google Scholar 

  • Renkow, M., Hallstroma, D. G., & Karanjab, D. (2004). Rural infrastructure, transactions costs and market participation in Kenya. Journal of Development Economics, 73(1), 349–367.

    Article  Google Scholar 

  • Rodriguez, F., & Sachs, J. (1999). Why do resource-abundant economies grow more slowly? Journal of Economic Growth, 4(3), 277–303.

    Article  Google Scholar 

  • Rodrik, D. (2006). Goodbye Washington consensus, hello Washington confusion? A review of the World Bank’s economic growth in the 1990s: Learning from a decade of reform. Journal of Economic Literature, XLIV(December), 973–987.

  • Roland-Holst, D. (2004). CGE methods for poverty incidence analysis: An application to Vietnam’s WTO accession. Paper presented at the seventh annual conference on global economic analysis: Trade, poverty, and the environment (pp. 17–19). Washington, DC: The World Bank.

  • Rutherford, T. F., Shepotylo, O., & Tarr, D. (2004). Poverty effects of Russia’s WTO accession: Modeling ‘real’ households and endogenous productivity effects. (Policy research working paper WPS3473). Washington, DC: World Bank.

  • Sachs, J., & Warner, A. (1997). Sources of slow growth in African economies. Journal of African Economies, 6(3), 335–376.

    Google Scholar 

  • Sachs, J., & Warner, A. (2001). The curse of natural resources. European Economic Review, 45(4–6), 827–838.

    Article  Google Scholar 

  • Straub, S. (2008) Infrastructure and growth in developing countries: Recent advances and research challenges. (Policy research working paper WPS4460). Washington, DC: World Bank.

  • Syrquin, M. (1988). Patterns of structural change. In H. Chenery & T. N. Srinivasan (Eds.) Handbook of development economics 1, chap. 7 (pp. 203–273). Amsterdam: North-Holland.

  • Thurlow, J., Morley, S., Pratt, A. N. (2008). Lagging regions and development strategies. (IFPRI Discussion Paper 898). Washington, DC: International Food Policy Research Institute.

  • Usui, N. (1997). Dutch disease and policy adjustments to the oil boom: A comparative study of Indonesia and Mexico. Resources Policy, 23(4), 151–162.

    Article  Google Scholar 

  • World Bank. (1993). World development report 1993. Washington, DC: World Bank.

    Book  Google Scholar 

  • World Bank. (2005). Economic growth in the 1990s: Learning from a decade of reform. Washington, DC: World Bank.

    Google Scholar 

  • World Bank. (2008). Agriculture for development. World development report 2008. Washington, DC: World Bank.

  • World Bank. (2009a). Reshaping economic geography. World development report 2009. Washington, DC: World Bank.

  • World Bank. (2009b). Economy-wide impact of oil discovery in Ghana. report no. 47321-GH. Washington, DC: World Bank.

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Manfred Wiebelt.

Appendix

Appendix

See Tables 4, 5, 6, 7, and 8.

Table 4 Production and trade structure, Ghana 2007 (percent)
Table 5 Output, input, and trade structure of agriculture, Ghana, 2007 (%)
Table 6 Change in disaggregated factor income distribution
Table 7 Simulation results of the poverty effects of a temporary increase in government oil revenues (poverty depth)
Table 8 Simulation results of the poverty effects of a temporary increase in government oil revenues (Poverty severety)

About this article

Cite this article

Wiebelt, M., Schweickert, R., Breisinger, C. et al. Oil revenues for public investment in Africa: targeting urban or rural areas?. Rev World Econ 147, 745 (2011). https://doi.org/10.1007/s10290-011-0101-2

Download citation

  • Published:

  • DOI: https://doi.org/10.1007/s10290-011-0101-2

Keywords

  • Oil revenue
  • Public investment
  • Productivity
  • Africa
  • Agricultural development
  • Poverty

JEL Classification

  • H4
  • O5
  • Q3