Monday, July 07, 2008

Genuine Saving and the Voracity Effect

A little bit of environmental economics theory to start the week. Those taking my 211 course will all be aware of the Hotelling rule - this paper is a nice addition to the literature.

This is a timely extension and political economy results of this type are big business in current economics research. The results appear plausible.

Genuine Saving and the Voracity Effect [CEPR Working papers]

Many resource-rich countries have poor economic performance and suffer from negative genuine saving rates, especially if they have many rival factions and badly functioning legal systems. We attempt to shed light on these stylized facts by analyzing a power struggle about the control of natural resources where competing factions in society have a private stock of financial assets and a common stock of natural resources. We solve a dynamic common-pool problem and obtain political economy variants of the Hotelling rule for resource depletion and the Hartwick saving rule necessary to sustain constant consumption in an economy with exhaustible natural resources. The rate of increase in the price of natural resources and resource depletion are faster than demanded by the Hotelling rule. As a result, the country substitutes away from resources to capital so that it saves and invests more than a homogenous society. The power struggle boosts output. Nevertheless, fractionalization depresses aggregate consumption and social welfare and leads to negative genuine saving if properly corrected for common-pool externalities. Fractionalization induces, however, positive genuine saving as measured by the World Bank.


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