Working Paper: CEPR ID: DP7021
Authors: Frederick van der Ploeg
Abstract: We investigate the Hartwick rule for saving of a nation necessary to sustain a constant level of private consumption for a small open economy with an exhaustible stock of natural resources. The amount by which a country saves and invests less than the marginal resource rents equals the expected capital gains on reserves of natural resources plus the expected increase in interest income on net foreign assets plus the expected fall in the cost of resource extraction due to expected improvements in extraction technology. Effectively, depletion is then postponed until better times. This suggests that it is not necessarily sub-optimal for resource-rich countries to have negative genuine saving. However, in countries with different groups with imperfectly defined property rights on natural resources, political distortions induce faster resource depletion than suggested by the Hotelling rule. Fractionalised societies with imperfect property rights build up more foreign assets than their marginal resource rents, but in the long run accumulate less foreign assets than homogenous societies. Hence, such societies end up with lower sustainable consumption and are worse off, especially if seepage is strong, the number of rival groups is large and the country does not enjoy much monopoly power on the resource market. Genuine saving is zero in such societies. However, World Bank genuine saving figures based on market rather than accounting prices will be negative, albeit less so in more fractionalised societies with less secure property rights.
Keywords: Accounting price; Capital; Common pool; Exhaustible resources; Extraction technology; Fractionalisation; Genuine saving; Hartwick rule; Hotelling rule; Property rights; Seepage; Sovereign wealth fund; 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 |
|---|---|
| Countries with abundant natural resources (Q33) | Decreased current saving (E21) |
| Anticipated improvements in extraction technology (L71) | Negative genuine saving rates (E21) |
| Fractionalized societies with insecure property rights (P14) | Accelerated resource depletion (Q32) |
| Fractionalized societies (J15) | Lower sustainable consumption levels (E21) |
| Fractionalized societies (J15) | Accumulate less foreign assets over time (F21) |
| Genuine saving rates can be zero in both homogenous societies with secure property rights and fractionalized societies with insecure property rights (E21) | Political distortions in resource management (P28) |