Working Paper: CEPR ID: DP6831
Authors: Frederick van der Ploeg
Abstract: Many resource-rich countries have poor economic performance and suffer from negative genuine saving rates, especially if they have many rival factions and badly functioning legal systems. We attempt to shed light on these stylized facts by analyzing a power struggle about the control of natural resources where competing factions in society have a private stock of financial assets and a common stock of natural resources. We solve a dynamic common-pool problem and obtain political economy variants of the Hotelling rule for resource depletion and the Hartwick saving rule necessary to sustain constant consumption in an economy with exhaustible natural resources. The rate of increase in the price of natural resources and resource depletion are faster than demanded by the Hotelling rule. As a result, the country substitutes away from resources to capital so that it saves and invests more than a homogenous society. The power struggle boosts output. Nevertheless, fractionalization depresses aggregate consumption and social welfare and leads to negative genuine saving if properly corrected for common-pool externalities. Fractionalization induces, however, positive genuine saving as measured by the World Bank.
Keywords: Capital; Common Pool; Exhaustible Natural Resources; Fractionalization; Genuine Saving; Hartwick Rule; Hotelling; Resource Rents; Rapacious Rent Seeking; Sustainable Consumption; Voracity
JEL Codes: E20; F32; O13; Q01; Q32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| voracity effect (D11) | faster depletion of resources (Q31) |
| fractionalization (F12) | higher rate of resource depletion (Q32) |
| power struggle (D74) | negative genuine saving rates (E21) |
| fractionalization (F12) | saving behavior (D14) |
| increased competition (L13) | greater saving (D14) |
| power struggle (D74) | enhances output (E23) |
| power struggle (D74) | reduces aggregate consumption (E21) |
| fractionalization (F12) | lower consumption levels (E21) |