LAUSR

Fragile countries face competing needs for allocating valuable natural resource potential, including for using the resource revenue to scale up public investment and close large infrastructure gaps. This paper uses the recently developed Debt, Investment, Growth and Natural Resources (DIGNAR) model to characterise optimal allocations of resource wealth, with a focus on the particular economic structures of fragile countries. This study adds to the existing literature by not only carefully applying the DIGNAR model to quantify key policy trade-offs facing resource-rich fragile Western African countries such as Cote d'Ivoire, Guinea, Liberia and Sierra Leone, but also by extending the model to account for the possibility of direct social transfers and of an endogeneous determination of the investment path based on fiscal rules. Key results, with far-reaching policy implications for accelerating inclusive growth stand out from the simulations. First, compared with a conservative approach based on the permanent income analysis, a sustainable non-resource deficit target is robust to the high uncertainty of resource revenues, while delivering growth benefits through higher productive public capital. Second, distributing part of resource revenues as transfers raises private consumption immediately, suggesting that a fraction of the resource revenue could be used to expand safety nets in fragile states.