31
indicates that after a windfall, one should gradually adjust the optimal share of national
wealth consumed downwards and accept some adverse Dutch disease effects (Matsen and
Torvik, 2005). Lower growth in resource rich economies may thus be part of an optimal
growth path. The challenge is to re-investigate these issues for a dependent economy with
capital accumulation, specific factors or intrasectoral adjustment costs and learning by doing,
where wages and capital intensities are not fixed by technology and the world interest rate.
Non-renewable or exhaustible resources typically imply steady declines in income per
capita. With environmental resources being a production factor and production displaying
constant returns to scale, capital and labour run into jointly diminishing returns (Nordhaus,
1992). In the AK-model of endogenous growth with natural resources as production factor, a
positive growth rate of consumption cannot be sustained forever either (Aghion and Howitt,
1988, Chapter 5). Faster population growth increases pressure on the finite resource and thus
reduces per capita growth. However, resources such as fisheries, forests and agricultural land
are renewable. This raises questions about how a limited renewable resource sector can co-
exist with a growing sector in balanced growth equilibrium. Typically, this requires
technological progress in use of the resource to be sufficiently faster than in use of other
inputs. If proper account is taken of renewable resources, ongoing growth is feasible (e.g.,
Bovenberg and Smulders, 1996; EHasson and Turnovsky, 2004).
The literature on optimal oil exploitation pays ample attention to the market structure
of oil producers. Typically, the monopolist OPEC is considered together with a competitive
fringe of price-following oil producers. One feedback Nash outcome is an initial phase where
the monopolist sets prices low enough to exhaust the fringe and a final phase where the
monopolist enjoys higher monopoly profits; the price at the end of the first phase is then not
high enough to incite the fringe to postpone extraction (Newbery, 1981; Groot et al., 2003).
4.2. Genuine saving and the wealth of nations: a pragmatic guide
The Hartwick rule of investing all resource rents in other forms of capital provides a
pragmatic guide for sustainable development. Genuine saving is the traditional concept of net
saving, namely public and private saving minus depreciation of public and private investment,
plus current spending on education to capture the change in intangible (human) wealth minus
the value of net depletion of exhaustible natural resources and renewable resources (forests)
minus damages of stock pollutants (carbon dioxide and particulate matter) (Hamilton and
Clemens, 1999; Hamilton and Hartwick, 2005). Alas, fisheries, diamonds, subsoil water and
soil erosion are not dealt with due to data problems. With positive genuine saving, a nation
becomes richer and social welfare increases, and with negative genuine saving, a nation loses
15 Appendix 3 shows how to optimally convert depleting exhaustible resources into physical capital for