What are the best ways for developing countries, like Ghana, to optimally harvest large expected oil revenues? Standard recommendations call for policies based on permanent-income and bird-in-hand rules. These, however, may be more appropriate for rich economies than for capital-scarce, credit-constrained developing countries, where it may be more efficient and politically feasible to use oil revenues to stimulate private and public investment, provide insurance against aggregate productivity shocks or pay off international debt than to build up a sovereign wealth fund or rebate oil income to households.
The aim of this project is to construct and calibrate a macroeconomic dynamic stochastic general equilibrium model of the Ghanaian economy with the purpose of generating optimal ways of harnessing oil revenues for economic development and comparing them with more ad-hoc permanent-income and bird-in-hand rules familiar from many studies of the IMF and others. There are three main reasons that suggest it might not be desirable for Ghana to follow standard policies.
First, the quality and quantity of public infrastructure, relative to international levels, is quite low. In as far as public infrastructure investment plays a role in promoting growth and in as far as scarcity implies high returns, there may be a motive for government to invest in productive projects. Second, if Ghana faces a risk premium on its international debt, it may not be optimal to rebate oil income to consumers. If international debt increases substantially before oil production comes online, the government may avoid the high service costs of this debt (due to the risk premium), by using oil revenues to repay the foreign debt. Third, the system of private sector banking in Ghana is relatively undeveloped, suggesting that consumers are credit constrained and unable to adequately insure against aggregate productivity shocks. There may be a role for government to accumulate debt when faced with negative productivity shocks in an attempt to smooth household consumption. More important, the government of Ghana faces the challenge of coping with the notorious volatility of oil prices on world markets and public revenue as oil accounts for a growing share of public revenue.
