Optimizing What?

The previous post got a pretty good debate going about oil policy. One point, though, kept coming up in different ways from different commenters: seeing “optimizing the tax take” as the goal of the exercise is badly misguided. It’s the development outcomes associated with oil exploitation that we need to optimize, not the tax take.

Ni es lo mismo, ni es igual.

Update: One readers, though, thinks this is taking a step backward:

Development outcomes associated with oil exploitation? What does that even mean?

First of all, development outcomes are very broad and difficult to measure. Second, relevant development outcomes are not uniquely and directly related to oil exploitation. That is, those development outcomes depend on a broader set of policies, not only on oil policies. Ideally you’d like to design all government policies, not only oil policies, in order to optimize society’s welfare, which you could very well reduced to a battery of development indices. However, that might be a bit cumbersome.

One way to face that problem is to break it in a set of smaller problems. One of them would be to set an easy rule of thumb for your oil policy. One could argue that a good rule of thumb is to maximize the oil tax revenue over a reasonable period of time (i.e., the present value of tax revenues over 10 years). In this case, maximizing the tax take is only an intermediate goal towards optimizing whatever development outcomes you see fit. These goals are not at all contradicting. Quite the opposite, they are actually complementary.

In fact, one could prove that the optimal oil policy (having in mind the ultimate goal of people’s welfare) goes through maximizing oil tax revenues.

This goal has one advantage: it’s easy to measure. Also it relatively easy and straightforward to design your oil policy with that in mind.

Which sounds appealing, except maximizing the tax take suggests maximizing Dutch Disease as well. (La era del parásito feliz, is how Uslar Pietri used to call it…)