Oil Discoveries, Intertemporal Adjustment and Public Policy

Abstract

There is increasing suspicion that high but temporary oil revenues may be somewhat of a mixed blessing, unless proper public policy eases the adjustment process to an oil-based economy and, where relevant, prepares for “re-entry” once the oil wells have run dry. The paper discusses to what extent public intervention is needed within the framwork of a two-sector, disequilibrium model. The analysis is focused on two issues. Firstly the possibility that spending of oil revenues may result in classical unemployment in a situation with real wage indexation, and which policy measures will be effective in ameliorating this situation. And secondly, the case for subsidies to the non-oil traded goods sector if there are substantial learning-by-doing externalities arising in this sector.