Discount Rate Distortions and the Resource Curse
South African Journal of Economics, Volume 81, Issue 1, pp 1-19, March 2013.
19 Pages Posted: 23 Nov 2016
Date Written: March 1, 2013
Empirical evidence has suggested a “resource curse” exists, in which countries with abundant resources may have higher initial consumption but then grow more slowly. The effect appears to be dependent on a country’s political structure. Theoretical models not typically accounted for historical exceptions, or have not shown the effect exists in a dynamic growth setting. We derive the resource curse effect in an optimal growth model augmented with a political process. The economy has a finite nonrenewable resource, and the government planner can choose to overextract natural resources relative to the efficient path by distorting the discount rate, but in so doing incurs political costs that depend on the presence of democracy. Government planners in non-democratic countries usually have more autonomy in policymaking than those in democratic countries; therefore, the political cost is lower for non-democratic countries. We show that the incentive for the planner to distort the extraction path is larger, the higher is the initial resource endowment. Consistent with empirical evidence, the distortion raises short-term consumption but lowers the long-term growth rate, and institutional differences create corner solutions that explain why some resource-abundant countries avoid the curse. These results are robust to the inclusion of autonomous technological change.
Keywords: Discount rate, optimal growth, resource curse, technical progress
JEL Classification: O13, 23, 53, 54, 18, Q32, Q38
Suggested Citation: Suggested Citation