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International Tax and Public Finance

, Volume 19, Issue 4, pp 509–538 | Cite as

Bottlenecks in ramping up public investment

  • Frederick van der PloegEmail author
Article

Abstract

A windfall in a developing economy with capital scarcity and investment adjustment costs facing a temporary windfall should be used to give more consumption to poorer present generations and to speed up development by ramping up public investment and paying off debt taking due account of the increasing inefficiency as investment gets ramped up. The optimal strategy requires negative genuine saving; the permanent income requires zero genuine saving. The optimal real consumption increments are smaller once one allows for absorption constraints resulting from Dutch disease and sluggish adjustment of ‘home-grown’ public capital.

Keywords

Optimal management of windfalls Economic development Capital scarcity Public capital PIMI Investment adjustment costs Absorption constraints Genuine saving Dutch disease 

JEL Classification

E60 F34 F35 F43 H21 H63 O11 Q33 

Notes

Acknowledgements

Financial support from the BP funded Oxford Centre for the Analysis of Resource Rich Economies is gratefully acknowledged. Useful discussions with Bernardin Akitoby, Andrew Berg, Philip Daniel, Sanjeev Gupta, Jenny Ligthart, Cathy Pattillo, Radek Stefanski, Simone Valente, Tony Venables, David Wildasin, and Sam Wills and the detailed and insightful comments of Ruud de Mooij are gratefully acknowledged.

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Copyright information

© Springer Science+Business Media, LLC 2012

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of OxfordOxfordUK

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