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

See all articles by Bin Hu

Bin Hu

Central University of Finance and Economics

Ross McKitrick

University of Guelph - Department of Economics

Date Written: March 1, 2013

Abstract

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

Hu, Bin and McKitrick, Ross, Discount Rate Distortions and the Resource Curse (March 1, 2013). South African Journal of Economics, Volume 81, Issue 1, pp 1-19, March 2013. . Available at SSRN: https://ssrn.com/abstract=2873446

Bin Hu (Contact Author)

Central University of Finance and Economics ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Ross McKitrick

University of Guelph - Department of Economics ( email )

50 Stone Road East
Guelph, Ontario N1G 2W1
Canada
519-824-4120 ext 53051 (Phone)
519-763-8497 (Fax)

HOME PAGE: http://www.rossmckitrick.com/

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