Natural Resource Wealth and Directed Technical Change

This paper analyses the e¤ect of a resource discovery on an open economy with endogenous directed technical change. Technical progress depends on entrepreneurs who produce (or adopt) technology, and endogenously choose which sector to operate in. The static e¤ect of a resource discovery is deindustrialization and a rise in non-resource factor incomes, as in standard trade theory. Dynamically, the "brain drain" of entrepreneurs into the resource sector may exacerbate the de-industrialization over time, but if the discovery is not su¢ ciently large then it leads to temporarily lower growth in non-resource factor incomes, which are lower in the long run than without the discovery. In this case non-resource owners are made worse o¤ by the discovery. Second best trade or investment policies that direct entrepreneurs away from the resource sector may be used to raise long-run non-resource income, at a cost to GDP.