Thumbnail Image

General equilibrium analysis of potential use of natural resources revenue in Niger

Soumaila, Issoufou
Scope and Method of Study: The literature on "Dutch disease" emphasizes that an inflow of natural resource windfall in a country causes an appreciation of real exchange, thereby reducing the country's competitiveness. This phenomenon has triggered policy makers in countries expecting a natural resources windfall to ask the following question: how can countries avoid the Dutch disease? Although there is extensive literature on how to escape the Dutch disease, only very few studies have gone on to model the economy-wide impact of specific set of policy prescribed to deal with the Dutch disease. The following study contributes to the literature by using a dynamic computable general equilibrium model to quantify the effect of two investment policies on Niger's economy. First, the model is built and calibrated to a 2004 Social Accounting Matrix and one simulation is performed. In the simulation, the government is assumed to save half of the windfall and transfer the other half to each of the representative household groups in the model. Second, the model is modified and is used to quantify the use of natural resources revenue for investment in education and infrastructure.
Findings and Conclusions: The result of the first simulation shows that a resource windfall is growth promoting. However compared to the baseline, natural resource rent increases the overall price level and income inequality. When the windfall is invested in education or infrastructure, we get a higher level of gross domestic product (GDP) than obtained in the first simulation but also a lower price level and lower Gini coefficient. However superior results are obtained when the windfall is invested simultaneously in education and infrastructure, which implies a complementary effect between the two investment strategies. The policy implication of the study is that natural resource revenue in Niger should be invested in education and infrastructure to reduce the risk of Dutch disease and to promote economic prosperity.