Regular ArticleCurrent account norms in natural resource rich and capital scarce economies

- The PIH implies current account surpluses in resource rich economies.
- Resource rich developing countries face development needs and constraints.
- We model investment needs and pervasive constraints to study current account norms.
- Capital scarcity and borrowing constraints warrant lower current account surpluses.
- Current account norms also depend on inefficiencies and absorptive capacity.

The permanent income hypothesis implies that frictionless open economies with exhaustible natural resources should save abroad most of their resource windfalls and, therefore, feature current account surpluses. Resource rich developing countries (RRDCs), on the other hand, face substantial development needs and tight external borrowing constraints. By relaxing these constraints and providing a key financing source for public investment, resource windfalls might then be associated with current account deficits or at least low surpluses. In this paper, we develop a neoclassical model with private and public investment and several pervasive features in RRDCs, including absorptive capacity constraints, inefficiencies in investment, borrowing constraints, and capital scarcity. We use the model to study the role of investment and these frictions in shaping the current account dynamics under windfalls. Since consumption and investment decisions are optimal, the model also serves to analyze current account norms (benchmarks). We apply the model to the Economic and Monetary Community of Central Africa and discuss how our results can be used to inform external sustainability analyses in RRDCs.