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Author(s) / Editor(s): 
  • Lavan Mahadeva

Why does natural resource abundance not always lead to better outcomes? Limited financial development versus political impatience

Is the failure of natural resource abundance to achieve better economic outcomes due to limited nancial development or scal policy short-termism? I answer this question in a precautionary savings model where both resource revenues and asset returns are uncertain. Calibrating for Colombia, I nd that under policy impatience, welfare costs are large, net assets are insucient and net discretionary expenditures are too sensitive to resource revenues. If nancial markets are underdeveloped, we can generate welfare costs of the same magnitude but not also explain why there are insucient net eective assets, nor the heightened sensitivity to revenues.