PUBLIC-FINANCE, OIL REVENUE EXPENDITURE AND ECONOMIC-PERFORMANCE - A COMPARATIVE-STUDY OF 4 COUNTRIES

The literature of resource-based development has widely discussed the impacts of oil revenues on the economic structure of oil-exporting cou ntries. However, in addition to economic structure, oil revenues have a substantial impact on the growth and sustainability of the public se ctor in oil-exporting countries, which has not been discussed. This pa per develops a system dynamics model to analyze the dynamics of govern ment financial structure and public services in the course of developm ent based on oil revenues, In oil-exporting countries, governments use their oil revenues to finance development projects and pay for a majo r part of operating and maintenance cost of public services. Developme nt budget accumulates new capacity for public services and infrastruct ure. As public services capacity increases so does the required recurr ent budget to pay for the operating and maintenance cost. The governme nts would need more oil revenues to sustain the growth of public secto r and to pay for the growing recurrent budget. However, oil revenues c annot grow for ever. Limitation from market demand or oil reserves wou ld restrict continuous growth of oil revenues. Oil revenues stop growi ng and eventually will fall. Decline of oil revenues would create a fi nancial crisis for the public sector of oil-exporting countries. The d evelopment budget will fall below depreciation and public-sector capac ity will drop. The paper also considers investment in public enterpris es as another use of oil revenues, Since these enterprises do not usua lly produce a return, such investment will not impact the collapse of the public sector. The paper concludes with some policy recommendation s for increasing the chance of sustainability of the public sector in oil-exporting countries. (C) 1998 John Wiley & Sons, Ltd.