Wednesday, March 27, 2013

Managing Oil Wealth in Brazil

World Bank blog: 

Mr. Fajnzylber: The study showed that it would be optimal for Brazil to save a significant share of the oil windfall, not only with the objective of reducing the volatility of the economy around oil-price fluctuations, but also to help ensure inter-generational equity, fund pro-diversification investments, help smooth the consumption of poor households during economic downturns, and prevent sudden exchange appreciations in the short run. The project also showed that the oil windfall creates an additional motivation for redoubling efforts to improve public investment management and ensuring that oil-financed social expenditures are as progressive as Brazil’s social programs.

The Trade Post: What kind of resistance are you getting to this type of reform, and how do you try to overcome it?

Mr. Fajnzylber: There is a natural tendency for Brazil to increase public and private consumption and indebtedness ahead of the expected rise in national wealth associated with the new oil discoveries. If, however, the newly generated wealth were to be smaller than anticipated, the country would have to go through a potentially painful adjustment in consumption. To minimize this risk, we recommend that policies be based on the most conservative projections for oil production growth. Similarly, if at least part of the windfall is to be used to finance public or private investments, there may be trade-offs between the quality of those investments and the speed at which they can be implemented. In other words, the project showed that it may be optimal for Brazil to pace the exploitation of the new oil reserves with a view to maximize their potential transformative impact.

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