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interest groups. They also emphasise the rentier state and fault a state’s institutional weakness
to extract and deploy resources, enforce property rights and resist demands of rent seekers.
4. Why do many resource rich developing countries experience negative saving?
Section 3 has put forward eight important hypotheses on how natural resources affect the
economy, institutions, rent seeking, conflict and policy. Here we put forward two further
hypotheses to explain the stylized fact discussed in section 2.4 that many resource rich
developing countries are unable to fully transform their large stocks of natural wealth into
other forms of wealth. To set the scene, section 4.1 discusses the Hotelling rule for optimal
intertemporal depletion of natural resources and the resulting utilitarian outcome for
transforming depleting exhaustible natural resource assets into financial capital in a small
open economy. We suppose throughout that countries have some power on the market for
natural resources but are price takers in all other markets. Section 4.2 adopts a Rawlsian max-
min social welfare perspective to discuss the optimal level of sustainable consumption and the
Hartwick rule for re-investing resource rents into durable, non-exhaustible assets. It also
offers some evidence that many resource rich countries experience negative genuine saving.
Section 4.3 then puts forward the ‘anticipation of better times’ hypothesis, which suggests
that resource rich countries should borrow in anticipation of higher world prices for resources
and improvements in extraction technology in the future. Section 4.4 puts forward the
‘rapacious extraction’ hypothesis to explain how, in absence of effective government
intervention, conflict among rival factions induces excessive resource extraction and
investment and negative genuine saving when there is wasteful rent seeking, investment in
‘white elephants’ and short-sighted politicians.
4.1. Preamble: Optimal conversion of depleting natural resources into foreign assets
Most discussions of the resource curse and Dutch disease take the windfall as manna from
heaven. Earlier literature, however, deals with the optimal intertemporal depletion of
exhaustible resources (e.g., Dasgupta and Heal, 1979). The main result is the Hotelling rule,
which states that the rate of increase in the marginal rent of resources must equal the world
interest rate (possibly including a risk premium). With no extraction costs and constant
elasticity of demand for resources, the Hotelling rule states that the capital gain on resources
must equal the world interest rate. This is based on the arbitrage principle, which says that one
should be indifferent between keeping the resource under the ground (in which case the return
is the capital gain on reserves) and extracting, selling and getting a market return on it. The
rate of increase in marginal resource rents should thus equal the world interest rate. Since
marginal extraction costs differ widely across countries, optimal depletion rates vary widely
as well even if each country is a price taker.