“What should be the time profile of consumption and of saving and, if saving is taking place, what form should this take? Standard analysis of this question (such as that offered by the International Monetary Fund, e.g. Davis et al., 2002; Barnett and Ossowski, 2003) is based on the permanent income hypothesis (PIH), which suggests that saving should be such as to hold constant the level of resource wealth plus accumulated savings, with consumption just equal to the interest on this stock of wealth. In the simplest versions, these savings should be held abroad, in a Sovereign Wealth Fund (SWF) which will provide income for future generations. The PIH provides an important benchmark, and points to the importance of saving from resource revenues. It is certainly the case that many developing countries have saved too little of their resource revenues. However, we argue that the PIH is inappropriate for developing countries for several reasons.”
Spoiler: He argues that these countries should instead invest in their domestic economies. Dutch Disease? Capacity constraints? He does acknowledge these as important issues, but he remains steadfast. It’s an interesting read.
This post originally appeared on the Oxford SWF Project website.