Resource Abundance and Economic Development

By R. M. Auty | Go to book overview
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Hamilton and Clemens (1999) and Atkinson et al. (1997) have shown this to be true over decades as well.

The evidence suggests that, while extractive economies are potentially sustainable if resource rents are invested in other productive assets (including human capital), many of these economies have not chosen this path. The results presented here show distinctive patterns of genuine savings across country income and natural resource endowment groups. However, even robust genuine savings do not necessarily lead to a smooth development path if the quality of investment is low, as the financial crisis in Southeast Asia attests.

The genuine savings analysis raises an important set of policy questions that transcend the traditional concern with the macro and microeconomic determinants of savings effort. The questions of rent capture, public investments of resource revenues, resource tenure policies, and the social costs of pollution emissions are equally germane in determining the overall level of saving, although it is clear that monetary and fiscal policy remain the big levers.

Finally, human capital plays an increasingly dominant role as development proceeds, as Table 1.2 demonstrates. The next chapter shows how the rate of accumulation of human capital is affected by the natural resource endowment.


Appendix 3.1 Deriving Net Income and Genuine Saving

What follows is an outline of a general result with regard to savings and sustainability. We assume a simple economy in which a composite good can be consumed, invested, or used to abate pollution. Welfare U for the representative individual in this economy is a function of consumption and some number of stocks of living and nonliving natural resources and pollutants, with the stocks of natural resources (e.g., forests and other green spaces) generally adding to welfare, and the stocks of pollutants decreasing it. The measure of wealth W for this society is defined to be the present value of welfare on the optimal path over an infinite time horizon,

where ρ is the pure rate of time preference (assumed to be constant).

Production in this simple economy is defined by an aggregate production function that combines produced assets and natural resources (labour and population are assumed to be constant, and so are factored out of the model) to yield the composite good. Production leads to pollution emissions, which may be abated by some input of the composite good; pollution emissions accumulate in stocks that dissipate as a result of natural processes.

Genuine saving G for this economy is defined to be the sum of the net investment in produced assets and the physical changes in the various stocks of natural resources and pollutants, valued at the shadow prices supporting the optimal path—scarcity rents in the case of natural resources, marginal damages in the case of pollutants. For this simple model it follows

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