Natural Resources: Curse or Blessing?

33

to save more than their resource rents.¹⁶ Sub-Saharan Africa has high population growth and
shows substantial saving gaps typically of 10 to 50 percent of GNP. For Congo and Nigeria
the saving gaps are as high as 110 percent and 71 percent, respectively.

Even countries that save a large part of their natural resource wealth can fare badly.
An early influential study found that about half of the windfall income of six oil-producing
countries (Algeria, Ecuador, Indonesia, Nigeria, Trinidad and Tobago, and Venezuela) after
the oil price hikes of 1973 and 1979 was invested domestically (overwhelmingly by the public
sector), but that nevertheless all countries experienced prolonged periods of real exchange
appreciation and negative growth (Gelb, 1988). The roots of this puzzling feature may be
investment in socially undesirable public investment projects or ‘white elephants’ (Robinson
and Torvik, 2005) and high population growth. We show in the next section that, even
without such ‘white elephants’, it may not be optimal for such countries to save less than their
resource rents if world resource prices are expected to increase and improvements in
exploration technology are anticipated in the future.

4.3. Anticipation of better times can induce negative genuine saving

Consider a small resource-exporting economy which takes the world interest and world price
for its final products as given, but exerts some monopoly power on the world market for
natural resources. We investigate max-min social welfare and investigate what needs to be
done to sustain a constant level of per-capita consumption.¹⁷ To do this, suppose that there is
no use of exhaustible resources in production and no population growth. The production
function is f(K) with f>0 and f"<0, and there is no depreciation of the capital stock. The cost
of extracting E units of resources is TC(E) with C'>0 and C"≥0, where a fall in T indicates a
boost to extraction productivity. World demand for oil equals E = E(Q/Q*) with ε ≡
- Q E'( Q )/E > 1, where Q* is the world price of oil sold by its competitors. Saving of the
nation is given by

A = r (A - K) +[QE - TC(E)] + f(K) - C.

The initial stock of oil S0 defines the maximum amount of oil that can be depleted:

¹⁶ Positive population growth gives a negative shadow price of time and thus positive genuine saving;
technical progress gives a positive shadow price of time and negative genuine saving (Farzin, 2010).

¹⁷ Although the Keynes-Ramsey rule, C / C = σ(r - ρ), suggests that it is feasible to sustain a constant
level of per-capita consumption in the small resource-exporting economy even if there is no max-min
welfare (i.e., σ ≠ 0) provided that r* = ρ, this is not the case for the closed economy. The optimal path

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