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Genuine Saving and the Voracity Effect

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  • Frederick van der Ploeg

Abstract

Many resource-rich countries have negative genuine saving rates, so deplete their exhaustible natural resource wealth faster than they build up wealth in other assets. This phenomenon is stronger in more fractionalized countries with poor legal systems. We explain this by a power struggle about the control of natural resources. Competing fractions in society thus 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. Resource depletion is faster than demanded by the Hotelling rule. As a result, the country has negative genuine saving rates and is running down its national wealth. The country saves more in financial assets than the current natural resource rents. Still, the erosion of natural wealth exceeds the accumulation of financial assets. Even though the power struggle boosts output, consumption is sub-optimally low. The highlighted political distortions are larger if the country is more fractionalized.

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Bibliographic Info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2007/38.

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Date of creation: 2007
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Handle: RePEc:eui:euiwps:eco2007/38

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Keywords: Exhaustible natural resources; Hotelling resource rents; Hartwick rule; genuine saving; capital; sustainable consumption; rapacious rent seeking; common pool; voracity; fractionalization;

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  1. Hartwick, John M, 1977. "Intergenerational Equity and the Investing of Rents from Exhaustible Resources," American Economic Review, American Economic Association, vol. 67(5), pages 972-74, December.
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