Advances in Measuring Sustainable Development
6. A Hartwick Rule counterfactual INTRODUCTION1 As presented in Chapter 5, there is by now a substantial empirical literature documenting the ‘resource curse’ or ‘paradox of plenty’. Resource-rich countries should enjoy an advantage in the development process, and yet these countries experienced lower GDP growth rates post-1970 than less well endowed countries. A number of plausible explanations for this phenomenon have been suggested: inﬂated currencies may impede the development of the non-oil export sector (‘Dutch disease’); easy money in the form of resource rents may reduce incentives to implement needed economic reforms; and volatile resource prices may complicate macroeconomic management, exacerbating political conflicts over the sharing and management of resource revenues. In the most extreme examples, levels of welfare in resource-rich countries are lower today than they were in 1970 – development has not been sustained by Pezzey’s (1989) deﬁnition. The Hartwick Rule (Hartwick, 1977) offers what Solow (1986) termed a ‘rule of thumb’ for sustainability in exhaustible resource economies – a maximal constant level of consumption can be sustained if the value of investment equals the value of rents on extracted resources at each point in time. For countries dependent on such wasting assets this rule offers a prescription for sustainable development,2 a prescription that Botswana in particular has followed with its diamond wealth (Lange and Wright, 2004). Drawing on a 30-year time series of resource rent data underlying the World Development Indicators (World Bank, 2004), in this chapter we construct a ‘Hartwick Rule counterfactual’: how rich would...
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