This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.In oil-dependent countries, a major issue is how to stabilize fiscal spending when government revenue fluctuates along with the international price of oil. A stabilization fund would allow the government to pull through an oil price trough and absorb windfall revenue when prices are high. This paper focuses on two key issues. First, the paper proposes to base government spending on moving averages of past oil prices that are shown to behave nearly as a random walk. Second, it uses Monte Carlo simulations of a fiscal policy model to look at the probability that a given level of assets in the stabilization fund is exhausted over a certain number of years. The simulations show that with a fiscal policy based on moving averages over three to five years, a stabilization fund of about 75 percent of 2004 oil revenue would be adequate, which, in Nigeria, would equate to US$16-18 billion. JEL Classification Numbers: E27, E63, H62, Q38
The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.
Development agencies expend large amounts of money and manpower ostensibly to achieve development outcomes that improve living conditions in developing countries. If development agencies cared only about development outcomes and these were easily observable in a timely manner, development agencies would 'buy' the best outcomes they could get for their money. And if someone else could get it for them at a lower cost, they would transfer the funds to this other agency. Unfortunately, outcomes are not easily observable, they often take years to appear, and frequently the 'shopper' cares more about being seen shopping than about what ends up in the cart. So how do we go about creating a functioning market for development outcomes? What role can the evaluation function play in helping the process of internalising development outcomes into the development agencies' objective functions and thereby aligning incentives with the ultimate goal of improving lives? We present the development business through the lenses of the literature on externalities, principal-agent problems, and decision-making under uncertainty. We also present examples of solutions from multilateral and bilateral development institutions.
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