May 2010

IZA DP No. 4923: Trade and Migration with Renewable Natural Resources: Out-of-Steady-State Dynamics

published in: Journal of Development Economics, 2013, 104, 1-15 (Lead Article)

Commodity price increases associated with the entry of China, India and other countries into the world economy has led to increased pressure on common-property renewable natural resources (NR). The problem is particularly worrisome for economies that obtain a large share of their income from the exploitation of NR in the production of an exportable commodity. This paper contributes to the analysis by examining the issue in the framework of a general equilibrium dynamic model and by solving for both the steady state and the transition dynamics. We show that i) a resource-rich, capital-poor economy is more likely to be subject to a "natural resource curse" and complete (irreversible) NR depletion; ii) the latter's likelihood rises with the relative commodity price and labor inflow; iii) a labor inflow under internal equilibrium results in a higher steady-state capital-labor ratio and manufacturing output, and unchanged NR and commodity output; iv) import and export taxes result in a larger steady-state NR and commodity output and a smaller capital stock and manufacturing output, and may prevent complete NR depletion; and v) the latter may also be prevented through capital inflows (foreign aid) and labor outflow (openness by the North), improved regulation, technical change and a production tax.