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and results are often clouded by confounding factors. The discovery of natural resources has
often been associated with devastating conflicts and disastrous economic performance. Future
research should thus extend the normative theories of optimally converting depleting natural
resources into productive assets on to allow for rent seeking, corruption and conflict. More
generally, more work is needed on how to manage natural resource revenues in a way that
promotes sustainable growth, alleviates poverty and avoids conflict. This challenge is
particularly relevant for the resource rich, volatile and conflict prone economies of Africa
with their high population growth rates and poor institutions.
Appendix 1: Unemployment and Dutch disease
A higher world price of natural resources has in the presence of short-run nominal rigidities
significant effects on unemployment and inflation (Eastwood and Venables, 1982; Buiter and
Purvis, 1983; van Wijnbergen, 1984b). Although a higher oil price boosts demand for the
domestic manufacturing good, that effect may be swamped by the real appreciation created by
increased demand for the home currency. The result may be a decline in domestic
manufacturing output and higher unemployment as well as a temporary rise in inflation. The
oil price shock has elements of both a demand and supply shock, but an increase in resource
reserves is mainly a demand shock. Natural resource discoveries generate permanent income
effects well beyond the productive life of the new natural resource reserve. The initial
increase in income above its permanent level leads to a current account surplus, but is
reversed when reserves runs out. Natural resource windfalls do not necessarily imply a
shrinking of manufacturing exports or output and an increase in unemployment, but if a
windfall is anticipated the real exchange will appreciate and unemployment will rise ahead of
the windfall. Other simulations of Dutch disease effects and unemployment use perfect-
foresight, intertemporal general equilibrium models with temporary real wage rigidity, short-
run capital specificity, long-run capital mobility between sectors, international capital
mobility, intermediate inputs, adjustment costs of investment, dynamics of capital
accumulation, government debt, current account imbalances and far-sighted behaviour of
firms and households (Bruno and Sachs, 1982). With overlapping generations or household
liquidity constraints, it matters whether the government uses the resource windfall to cut
public debt or increase transfers. Oil price shocks then induce real appreciation and transient
unemployment. It is worthwhile to investigate further the effects of resource dependence on
wage formation in competitive and non-competitive labour markets (Chatterji and Price, 1988;
Brunstad and Dyrstad, 1997). Capital market imperfections may also generate adverse growth
effects of resource booms. For example, if resource income cannot be invested in
international capital markets, resource rich economies may experience slower steady-state
growth as people live beyond their means and are overshooting their steady-state levels
(Rodriguez and Sachs, 1999).
Appendix 2: Endogenous growth and Dutch disease
We extend Sachs and Warner (1995) to allow for natural resource use in production of traded
goods, RT. The traded and non-traded sectors have the same labour-augmenting productivity