Natural Resources and Economic Growth Some Theory

NaturalResourcesandEconomicGrowth:SomeTheoryandEvidence∗DustinChambers†andJang-TingGuo‡December4,2007∗Weareindebtedtoananonymousreferee,KenBaerenklau,Shu-HuaChen,KeithKnapp,SjakSmulders(theEditor)andRichardSuenforhelpfuldiscussionsandcomments.PartofthisresearchwasconductedwhileGuowasavisitingresearchfellowattheInstituteofEconomics,AcademiaSinica,whosehospitalityisgreatlyappreciated.Ofcourse,allremainingerrorsareourown.†DepartmentofEconomicsandFinance,SalisburyUniversity,1101CamdenAve.,Salisbury,MD21801,1-410-543-6320,Fax:[phone],E-mail:[e-mail].‡CorrespondingAuthor.DepartmentofEconomics,4128SproulHall,UniversityofCalifornia,Riverside,CA,92521,1-951-827-1588,Fax:[phone],E-mail:[e-mail]sastylizedone-sectorendogenousgrowthmodelinwhichrenewablenaturalresourcesarepostulatedasbothafactorofproductionandasameasureofenvironmentalquality.Weshowthatsustainedeconomicgrowthandanon-deterioratingenvironmentcancoexistalongtheeconomy’sbalancedgrowthpath.Moreover,theoutputgrowthrateispositivelyrelatedtothesteady-statelevelofnatural-resourceutilizationinproduction.Motivatedbythistheoreticalprediction,weestimateapanelcross-countrygrowthregressionthatincludesabroadmeasureofproductivenaturalresources–theEcologicalFootprint–asoneoftheconditioningvariables,andfindstrongempiricalsupport.Ourestimationresultsalsosuggestthatthecostsofenvironmentalconservationarefairlyminimal,andthatgrowthstrategiesbasedongreaterphysicalcapitalformationandopennesstointernationaltradeappeartooutperformthoserelyingonmoreintensiveutilizationoftheenvironment.Keywords:NaturalResources;EndogenousGrowth;EcologicalFootprint.JELClassification:O41;Q21;Q56.1.IntroductionInresponsetohighenergypricesandtheOPECoilembargoduringthe1970’s,economistsbegantosystematicallyexaminethegrowtheffectsofnon-renewablenaturalresourceswithindynamicgeneralequilibriummacroeconomicmodels.Forexample,usinganexogenous-growthframework,Solow(1974)andStiglitz(1974)showthatsustainedeconomicgrowthispossiblesolongasthereproduciblefactorofproduction(physicalcapital)canbesubstitutedforexhaustiblenaturalresourcesalongtheeconomy’sbalancedgrowthpath.1Thisfinding,whileunquestionablyessential,issomewhatrestrictiveinscopeinthatitignorestheimpactofeconomicactivitiesonthequalityandstateoftheenvironment.Asaresult,economistsbegantobroadentheirfocusandinvestigatetheinterrelationsbetweeneconomicgrowthandpollutionemissionsinthe1990’s.Specifically,Stokey(1998)findsthatcontinuinggrowthispossibledespiteevertighteningpollutionrestrictionsthataremetwithcostlyabatement.2Morerecently,BrockandTaylor(2005)demonstratetheco-existenceofsustainedeconomicgrowthandzeronetpollutionemissions(dubbedthe“KindergartenRule”)withinanendogenousgrowthmodelinwhichtheabatementtechnologyimprovesthroughlearning-by-doing.Althoughthislatterbranchoftheliteratureimplicitlydiscussestherelationshipbetweeneconomicdevelopmentandenvironmentalqualitythroughthenarrowlensofpollution,itneglectstheadditionalrolethatnaturalresourcesplayintheproductionofGDPandhencelong-runeconomicgrowth.Motivatedbythisgap,wedevelopastylizedone-sectorendogenousgrowthmodelthatcapturestheenvironment’sdualrolesas(i)aprovideroffactorsofproduction,and(ii)astockofrenewablenaturalresourcesthataccumulatesovertimetopreserveenvironmentalqualityasGDPcontinuestogrow.Ourmainfindingisthatinthelongrun,theeconomy’soutputgrowthrateispositivelyrelatedtothesteady-statelevelofutilizednaturalresources.Inaddition,apanelcross-countrygrowthregression,whichincludesabroadmeasureofproductivenaturalresources,providesstrongempiricalsupportforthistheoreticalprediction.1Suzuki(1976)findsthatcontinuingoutputgrowthcanarisewithinenvironmentalendogenousgrowthmodelsaswell.2SeeLopez(1994)andSmuldersandGradus(1996)forotherexamplesofgrowthmodelswithpollutionabatement.1TheresultsofSolow(1974),Stiglitz(1974),andStokey(1998),amongothers,togethersuggestthatsustainedeconomicgrowthispossibledespitelimitationsontheproductiveavailabilityofexhaustiblenaturalresources,andthatadditionalcostsandrestrictionsassociatedwithpreservingenvironmentalqualityarenotaninsurmountableimpedimenttogrowth.Bycontrast,thispaperfocusesonthefeasibilityofabalanced-growthequilibriumwithnon-deterioratingenvironmentalqualityinacanonicalone-sectorendogenousgrowthmodelwithrenewablenaturalresources.Inourmodeleconomy,householdsliveforever,providefixedlaborsupplyandderiveutilityfromconsumptiongoods.Ontheproductionside,acontinuumofidentical,competitivefirmsproduceoutputusingnaturalresources,whichareassumedtoregenerateataconstantrateovertime,asafactorofproduction.Theeconomy’saggregateproductionfunctiondisplaysincreasingreturns-to-scalebecauseofthepresenceofproductiveexternalitiesgeneratedbycapitalinputs.Weshowthatalongthebalancedgrowthpath(BGP),output,consumption,andphysicalcapitalallgrowatacommonpositiverate,whereasthestockoftotalnaturalresourcesandthelevelofnaturalresourcesallocatedtothefirms’productionprocessmaintaintheirrespectivesteady-statevalues.3Itfollowsthatthequantityofutilizednatu