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genuine saving should use accounting prices; if they use marginal revenues, they yield a too
optimistic estimate, and if they use market prices of resources, they yield a too pessimistic
estimate of genuine saving in fractionalized societies. Using true accounting prices, genuine
saving is zero, A (0) + Qa (0).S'(0) = A (0) - Qa (0)E(0) = 0, even though the struggle over
resources depresses consumption and welfare. Effectively, both resource extraction and
investment in foreign assets occur at a rate that is from a social perspective too high, thereby
leaving genuine saving unaffected.
Interestingly, rapacious rent seeking in itself does not explain the observed negative
genuine saving rates of many developing resource rich countries (unless erroneously market
rather than accounting prices are used to calculated genuine saving - a data artefact). The
‘anticipation of better times’ hypothesis (see section 4.4) helps to explain observed negative
genuine saving, but a deeper analysis of the political distortions of rapacious rent seeking
should offer a better explanation. Countries with a lot of fighting about natural resources
suffer from corruption and erosion of the quality of the legal system, thus discouraging saving
and investment in productive capital (see section 3.7), may over-invest in public investment
projects as an inefficient form of distribution to the own group members as they are not so
obviously corrupt within the context of a dynamic citizen-candidate model for a
representative democracy (cf., Besley and Coate, 1997, 1998), may over-invest in public
investment projects with negative social surplus (‘white elephants’) as a form of credible
redistribution as all politicians can commit to socially efficient public investment projects (cf.,
Robinson and Torvik, 2005), and often attract short-sighted politicians. If added to our
explanation of voracious resource depletion and excessive investment, these features should
give a realistic explanation of the negative genuine saving rates observed in many developing
resource rich economies.
5. Harnessing natural resource windfalls in developing economies
Despite the normative and political analyses of converting depleting natural resources into
productive assets discussed in section 4, there are good technical reasons to pump oil as fast
as possible out of the ground once a field has been opened. So it may be better to focus at the
optimal way of harnessing a given windfall (e.g., Collier et al., 2010). Such windfalls are
typically anticipated (five years or so) and temporary (say, 20 years). The benchmark for
harnessing such a windfall is based on the permanent income hypothesis, which says that
countries should borrow ahead of the windfall, pay back incurred debt and build up sovereign
wealth during the windfall and finance the permanent increase in consumption out of the
interest on the accumulated sovereign wealth after the windfall has ceased. Indeed, the IMF
affected by conflict among factions. The analysis focuses on Rawlsian max-min outcomes (σ = 0).