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Resource discoveries, learning, and national income accounting

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  • Hamilton, Kirk
  • Atkinson, Giles
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    Abstract

    Questions about the ultimate size of mineral and energy resource endowments and the degree of fiscal prudence which should be exercised by countries engaged in resource extraction have become central for many developing countries during the recent resource boom. To explore these questions, this paper develops a model of optimal resource extraction and discovery that combines two polar assumptions: (i) that discovering a resource today drives up the cost of future resource discoveries, and (ii) that extracting resources yields knowledge that reduces the cost of discovery. Although the model shows that resource discoveries should be valued at marginal discovery cost in measures of national saving and income, the ultimate size of the resource that can be exploited is the result of the interplay between rising discovery costs and accumulating knowledge. Empirical tests of the model show that the resulting income estimates would be extremely volatile for many extractive economies, owing to the lumpiness of resource discoveries. Two alternative accounting approaches, based on Hicksian concepts, yield more intuitive and less volatile income estimates. The question of fiscal prudence for extractive economies hinges on how optimistic countries are about the risks in future mineral and energy markets, and how far into the future these countries are willing to project optimistic trends when making decisions about how much to consume and how much to save of current resource revenues.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6505.

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    Date of creation: 01 Jun 2013
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    Handle: RePEc:wbk:wbrwps:6505

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    Related research

    Keywords: Environmental Economics&Policies; Economic Theory&Research; Debt Markets; Climate Change Economics; Banks&Banking Reform;

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    1. Deshmukh, Sudhakar D & Pliska, Stanley R, 1980. "Optimal Consumption and Exploration of Nonrenewable Resources under Uncertainty," Econometrica, Econometric Society, vol. 48(1), pages 177-200, January.
    2. M. L. Weitzman, 1974. "On the Welfare Significance of National Product in Dynamic Economy," Working papers 125, Massachusetts Institute of Technology (MIT), Department of Economics.
    3. Kirk Hamilton & Giovanni Ruta, 2009. "Wealth Accounting, Exhaustible Resources and Social Welfare," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 42(1), pages 53-64, January.
    4. Lasserre, Pierre, 1984. "Reserve and land prices with exploration under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 11(3), pages 191-201, September.
    5. van der Ploeg, Frederick, 2010. "Why do many resource-rich countries have negative genuine saving?: Anticipation of better times or rapacious rent seeking," Resource and Energy Economics, Elsevier, vol. 32(1), pages 28-44, January.
    6. James D. Hamilton, 2009. "Understanding Crude Oil Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 179-206.
    7. Asheim, Geir B., 2000. "Green national accounting: why and how?," Environment and Development Economics, Cambridge University Press, vol. 5(01), pages 25-48, February.
    8. Kirk Hamilton & John Hartwick, 2005. "Investing exhaustible resource rents and the path of consumption," Canadian Journal of Economics, Canadian Economics Association, vol. 38(2), pages 615-621, May.
    9. Hamilton, Kirk & Ruta, Giovanni & Tajibaeva, Liaila, 2005. "Capital accumulation and resources depletion - a Hartwick rule counterfactual," Policy Research Working Paper Series 3480, The World Bank.
    10. Kenneth Arrow & Partha Dasgupta & Karl-Göran Mäler, 2003. "Evaluating Projects and Assessing Sustainable Development in Imperfect Economies," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 26(4), pages 647-685, December.
    11. Asheim, Geir B. & Weitzman, Martin L., 2001. "Does NNP growth indicate welfare improvement?," Economics Letters, Elsevier, vol. 73(2), pages 233-239, November.
    12. John Livernois, 2009. "On the Empirical Significance of the Hotelling Rule," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 3(1), pages 22-41, Winter.
    13. Farzin, Y. H., 2001. "The impact of oil price on additions to US proven reserves," Resource and Energy Economics, Elsevier, vol. 23(3), pages 271-292, July.
    14. John Hartwick, 1976. "Intergenerational Equity and the Investing of Rents from Exhaustible Resources," Working Papers 220, Queen's University, Department of Economics.
    15. Pindyck, Robert S, 1978. "The Optimal Exploration and Production of Nonrenewable Resources," Journal of Political Economy, University of Chicago Press, vol. 86(5), pages 841-61, October.
    16. Kirk Hamilton & Cees Withagen, 2007. "Savings growth and the path of utility," Canadian Journal of Economics, Canadian Economics Association, vol. 40(2), pages 703-713, May.
    17. Hamilton, Kirk & Clemens, Michael, 1999. "Genuine Savings Rates in Developing Countries," World Bank Economic Review, World Bank Group, vol. 13(2), pages 333-56, May.
    18. Cairns, Robert D. & Van Quyen, Nguyen, 1998. "Optimal Exploration for and Exploitation of Heterogeneous Mineral Deposits," Journal of Environmental Economics and Management, Elsevier, vol. 35(2), pages 164-189, March.
    19. Devarajan, Shantayanan & Fisher, Anthony C, 1982. "Exploration and Scarcity," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1279-90, December.
    20. Swierzbinski, Joseph E & Mendelsohn, Robert, 1989. "Exploration and Exhaustible Resources: The Microfoundations of Aggregate Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(1), pages 175-86, February.
    21. Owen, Nick A. & Inderwildi, Oliver R. & King, David A., 2010. "The status of conventional world oil reserves--Hype or cause for concern?," Energy Policy, Elsevier, vol. 38(8), pages 4743-4749, August.
    22. Vincent, Jeffrey R. & Panayotou, Theodore & Hartwick, John M., 1997. "Resource Depletion and Sustainability in Small Open Economies," Journal of Environmental Economics and Management, Elsevier, vol. 33(3), pages 274-286, July.
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    Cited by:
    1. Dobronogov, Anton & Gelb, Alan & Saldanha, Fernando Brant, 2014. "How should donors respond to resource windfalls in poor countries ? from aid to insurance," Policy Research Working Paper Series 6952, The World Bank.

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