Natural Resource Economics. Lesson 2: Literature review

Transcription

1 Natural Resource Economics Academic year: Prof. Luca Salvatici Lesson 2: Literature review 1

2 Programme The course is organized in 3 sections: 1. Analytical techniques and modeling, 2. Principles of natural resource economics and policy, 3. Case studies and special topics: depending on current issues and on student interest. 2

3 Programme: modeling, definitions 1. Basic concepts 2. Solving numerical allocation problems 3. Optimal control theory 4. Phase diagrams 3

4 Programme: natural resource allocation problem 1. Fundamentals of non-renewable resource economics 2. Fundamentals of renewable resource economics: maximum sustainable yield, property rights allocation 3. Fisheries and forests: optimal harvesting, stock recovery, and assessing extinction risk 4

5 Objective Environmental economics is concerned with the way wastes are disposed and the conservation of natural environments Resource economics study how society allocates scarce natural resources, such as stocks of fish, stands of trees, fresh water, oil How much of the resource should be harvested/extracted today? 5

6 Outline 1. Definitions 2. Literature review 3. Globalization and natural resource curse 4. Dynamics and discounting 6

7 Renewable, Nonrenewable, and Enviromental Resources Economics might be defined as the study of how society allocates scarce resources. The field of resource economics would then be the study of how society allocates scarce natural resources. QUESTION 1: What is the central subject in the field of resource economics? A distinction between resources and environmental economics Natural is necessary Resource Economics to continue - Luca Salvatici our analysis. 7

8 RENEWABLE, NONRENEWABLE, AND ENVIROMENTAL RESOURCES Environmental Economics is concerned with the conservation of natural environments and biodiversity. But our study is about Natural Resources Renewable resource Nonrenewable resource Must display a significant rate of growth or renewal on a relevant economic time scale. An economic time scale is a time interval for which planning and management are meaningful. A critical question in the allocation of natural resources is How much of the resource should be harvest today, and in each period? Dynamic optimization problem 8

9 Question QUESTION 2: What is the economic distinction between renewable and non renewable resources? A renewable resource must display a significant rate of grown or renewal on a relevant economic time scale. An economic time scale is a time interval for which planning and management are meaningfuly. 9

10 RENEWABLE, NONRENEWABLE, AND ENVIROMENTAL RESOURCES Maximize some measure of net economic value Dynamic Optimization Problem Solution: schedule or time path indicating optimal amount to be harvested in each period. The optimal rate of harvest in a particular period may be zero Example If a fish stock has been historically mismanaged, and the current stock is below what is deemed optimal, then zero harvest may be best until the stock recovers. 10

11 Key features of natural resources Natural resources are stocks of materials that exist in the natural environment that are both scarce and economically useful in production or consumption, either in their raw state or after a minimal amount of processing. Imperfections in some natural resource markets raise questions about the efficiency of extraction and optimal extraction rates. Technical change and capital accumulation can partially offset the exhaustibility of nonrenewable resources. 11

12 Natural resources: basic concepts Natural resources are natural assets from which we derive value (utility) Broad definition includes amenity value, provision of ecosystem services, etc. We focus here on natural resources that must be extracted or harvested In general, efficient and optimal use of natural resources involves intertemporal allocation Distinguish between renewable and nonrenewable resources 12

13 Natural resources: definitions Limited availability (stock) at a given time and: Nonrenewable resources: given stock on a relevant economic time scale => Nonrenewable resources are incapable of significant growth, e.g., fossil fuels, ores, diamonds Renewable resources: renewable resources are capable of growth (on some meaningful timescale), e.g., fish, (young growth) forests => rate of growth is determined by biological factors that can be influenced by human activity but the maximum rate cannot be changed 13

14 Classical Economics Adam Smith: invisible hand of general equilibrium, social good by individual action Thomas Malthus: growing population, diminishing returns to scale in agriculture David Ricardo: diminishing quality (extensive margin), diminishing productivity (intensive margin) 14

15 Neo-Classical Economics Value is relative, determined in exchange, reflecting preferences, production costs and scarcity Demand and supply, partial and general equilibrium Absolute scarcity no longer seen as a problem (a reflection of the times) Earlier growth models: no resource limits 15

16 A pioneer Hotelling (1931): seminal article on the optimal use of a nonrenewable resource: Contemplation of the world s disappearing supplies of minerals, forests, and other exhaustible assets had led to demands for regulation of their exploitation. The feeling that these products are now too cheap for the good of future generations, that they are being selfishly exploited at too rapid a rate, and that in consequence of their excessive cheapness they are being produced and consumed wastefully has given rise to the conservation movement 16

17 A new attitude: Spaceship Earth In the 1960s and 70s, things changed: Limits to Growth, Silent Spring, oil crisis, pollution, congestion, space travel First, natural resources are scarce Second, environmental services are valuable Third, there are significant environmental externalities 17

18 IMPORTANT EVENTS IN MODERN ENVIRONMENTAL HISTORY 18

19 Is the Earth full? TED lecture: _the_earth_is_full#t

20 Natural resources and the intellectual debate "Natural resources are not finite. Yes, you read correctly," the economist Simon wrote in his 1981 manifesto, "The Ultimate Resource." The title referred to human ingenuity, which Simon believed could go on indefinitely expanding the planet's carrying capacity. This idea marked the crucial difference between economists and ecologists: the view of the world not as an closed ecosystem but as an flexible marketplace. The concept of carrying capacity might be rejected as other animal analogies: "Both the jayhawk and the man eat chickens, but the more jayhawks, the fewer chickens, while the more men, the more chickens. (19th-century economist Henry George) Economists are like the guy who jumps off the Empire State Building and says how great things are going so far as he passes the 10th floor. The resource that worries the most is the declining capacity of our planet to buffer itself against human impacts. Jared Diamond, Easter Island s End, Discover Magazine,1995: 20

21 Natural resources and globalization The globalization of natural resources trade has been driven by a number of factors, including population growth, spreading industrialization, and the rise of developing economies. A wide-ranging intellectual debate continues about the impact of economic growth on the earth s limited natural resources. Views have differed over the years as to whether natural resources are a blessing or a curse for economic development. 21

22 22 Non-renewable resources and development Non-renewable mineral resources are dominant for the economies of over half of the world s countries which collectively account for a quarter of global GDP. Africa alone is home to 30% of the world s mineral reserves, 10% of the world s oil, and 8% of the world s natural gas. The International Council on Mining and Metals estimates that FDI in the mining sector, on average, accounts for 60 90% of total FDI in low- and middleincome resource rich countries, however the sector only contributes between 3 20% of government revenue, 3 10% of national income, and 1 2% of employment in these economies.

23 Trade in natural resources The share of natural resources in world trade has risen sharply in recent years. The recent rise is mostly due to rising commodity prices, particularly for oil. Fuels account for more than three quarters of natural resources trade 23

24 Prepare to vote Internet 1 2 This presentation has been loaded without the Shakespeak add-in. Want to download the add-in for free? Go to TXT 1 2 Voting is anonymous 24

25 Lack of resources has not hindered resource-poor countries from rising to enviable heights in the arenas of economic growth and social development. It can actually be argued that not having resources freed these countries from the shackles that have been associated with resources. A. I agree B. I disagree The question will open when you start your session and slideshow. Closed Internet This This text presentation box will be used has been to describe loaded the without different the message Shakespeak sending add-in. methods. Want to download the add-in for free? Go to # Votes: 0 The applicable explanations will be inserted after you have started a session. Natural TXT Resource Economics - Luca Salvatici 25

26 Lack of resources has not hindered resource-poor countries from rising to enviable heights in the arenas of economic growth and social development. It can actually We will be set these argued example results that to zero not once you've started your session and your slide show. having resources freed these countries from the In the meantime, feel free to change the looks of shackles that have been associated your results (e.g. with the colors). resources. A. I agree 50.0% B. I disagree 100.0% Closed Internet This This text presentation box will be used has been to describe loaded the without different the message Shakespeak sending add-in. methods. Want to download the add-in for free? Go to The applicable explanations will be inserted after you have started a session. Natural TXT Resource Economics - Luca Salvatici

27 Resource curse I Is natural resources abundance good for countries? Natural resource endowments are not widely dispersed among countries, but rather are geographically concentrated in a few fixed locations. The dominance of a natural resource in an economy may harm economic performance. Such resource abundance does not always lead to sustained economic growth and development, in fact it can have the opposite effect a phenomenon termed the resource curse hypothesis or the paradox of plenty. 27

28 Resource curse II It has been observed for some decades that the possession of oil, natural gas, or other valuable mineral deposits or natural resources does not necessarily confer economic success (weak sustained economic growth and development). Many African countries such as Angola, Nigeria, Sudan, and the Congo are rich in oil, diamonds, or other minerals, and yet their peoples continue to experience low per capita income and low quality of life. Meanwhile, the East Asian economies Japan, Korea, Taiwan, Singapore and Hong Kong have achieved western-level standards of living despite being rocky islands (or peninsulas) with virtually no exportable natural resources. 28

29 Resource curse III Views have differed over the years as to whether natural resources are a blessing or a curse for economic development: natural resource endowments are key to countries comparative advantage and critical to economic growth dependency on natural resource exports can trap countries in a state of under-development. 29

30 Resource curse: causes The resource curse is hypothesized to happen for many different reasons: volatility of revenues from the natural resource sector due to exposure to global commodity market swings; government mismanagement of resources, or weak, ineffectual, unstable or corrupt institutions (possibly due to the easily diverted actual or anticipated revenue stream from extractive activities); a decline in the competitiveness of other economic sectors ( Dutch disease see below). 30

31 The «Dutch disease» The Dutch disease occurs when an increase in revenues from natural resources deindustrializes a nation s economy by raising the real exchange rate, making the manufacturing sector less competitive (the term was coined in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959). This type of deindustrialization can be direct or indirect: Direct: when production shifts from manufacturing to the natural resources sector. The booming natural resources sector will take factor inputs (including labour) away from the rest of the economy. The excess demand for nontradable goods leads to an increase of the relative price of non traded goods and with the price of traded goods determined on world markets, this is equivalent to an appreciation of the real exchange rate. Indirect: when additional spending caused by the increase in natural resource revenues results in a further appreciation of the real exchange rate. If the manufacturing sector has benefited from positive externalities through learning by doing or other factors, the contraction in manufacturing output induced by the Dutch disease is likely to reduce the growth rate of the economy, with permanent effects on income levels. 31

32 Resource curse: other effects Resource dominance may have an indirect effect on economic growth through the institutional framework. It can either hamper growth in the presence of weak institutions, such as badly defined property rights, poorly functioning legal systems, and weak rule of law. Primary commodities can help emerging rebel groups to fund their operations, so natural resources increase the probability of civil wars. In addition, resource extraction can create grievances among the local population on account of such factors as insufficiently compensated land expropriation or environmental degradation. Countries marked by an uneven distribution of natural resources within their territory and ethnic divisions are particularly prone to civil conflict. 32

33 Resource curse: conclusion Trade may intensify or dilute natural resource dominance in an economy. Opening up to trade will increase the price of a natural resource and engender greater resource dominance. However, trade may also offer opportunities for diversification of the production base and therefore reduce dominance. The latter effect will depend largely on whether governments pursue relevant supporting policies for diversification. Empirical literature on the natural resource curse has so far failed to reach unified conclusions. Earlier literature identified a negative relation between growth and resource dependency. Subsequent work pointed to institutional quality as a crucial determinant of whether natural resource abundance is a curse or a blessing, arguing that resource abundance indirectly affects economic growth through its adverse impact on institutions. More recent empirical contributions have criticized the finding that natural resource abundance is a curse, arguing that natural resource dominance can have zero or even positive effects on growth if abundance is correctly measured, additional variables that correlate with resource abundance are taken into account, and depletion of the resource over the sample period is factored into the assessment. 33

34 Resource curse: reading Anthony J. Venables, Using Natural Resources for Development: Why Has It Proven So Difficult?, Journal of Economic Perspectives Volume 30, Number 1 Winter 2016 Pages ( doi= /jep