Assessing the Effects of Natural Resources on Long-Term Growth : An Extension of the World Bank LongTerm Growth Model

This paper extends the World Bank's Long-Term Growth Model (LTGM) with the additionof a natural resource sector to analyze how long-run growth evolves in resource-rich countries and the growth impacts ofprice shocks and resource discoveries. In the LTGM-Natural Resource Extension (LTGM-NR), commodity price shocks affectlong-term economic growth through physical investment rates. As a large share of resource income typically accrues to thegovernment, the size of the boost to investment in a price boom depends on the government’s fiscal rule. Fiscal rulesthat prioritize public investment, like a Hartwick Rule, generally lead to the largest increases in long-term growth.However, structural surplus rules, which save commodity revenues, can also boost growth if they free up savings forprivate investment. The response of growth to discoveries of natural resources is similar to the response to priceshocks, although discoveries also produce a direct effect on real GDP, in addition to an indirect effect throughinvestment. The LTGM¬-NR also captures the effect of other (non-resource) growth fundamentals in resource-richeconomies, and it is better suited to general growth analysis in these countries than the standard LTGM. However,the LTGM-NR is a supply-side model, and so does not capture the short-run effects of price and discovery shocks thatoperate through aggregate demand.