Geography, Climate, Natural Resources & Growth

Summary

Assumptions

Types of Natural Resources

  1. Nonrenewable resources - Changes in level of resources 1. Discovery of new resources 2. Depletion of resources 3. Change in price making new sources viable 4. changes in technology
  2. Renewable resources ΔS_t=S_t+1-S_t=G_t-H_t where S_t is stock and G_t is growth and H_t is harvested

Model/Theory

Geography that matters:

  • Proximity to the ocean - affects openness
  • Economic spillover effects/clustering
  • Size of states & conduct of government 
    • Unification e.g. China means one large common market, less fighting, faster spread of ideas
    • Decentralization e.g. Europe 1. external competition (check on power) 2. f.o.p. (esp people) can move country. Europe has fragmented areas of fertile regions, India however is a counter-example.
  • Climate - latitude 
    • Agricultural productivity - relating to optimal temperate climate.
    • Diseases is more common in tropical regions.
    • People work harder in colder climates.
  • Natural resources
    • Resource curse
      1. Overconsumption (temporary booms) --> lower savings to maintain same level of consumption
      2. Dynamics of industrialization (shift away from manufacturing domestically - low transports costs and production abroad means there are less and less backward and forward linkages
      3. Politics - government spend the money on investment/infrastructure/education? - Often the presence of natural resources --> worst government policies

Global view - resource constrained?

  • Demand & Supply usual keeps scarcity of resources in check through higher prices but the environmental damage is largely an unpriced externality.
  • Renewable resources lead to a hill-shaped yield curve (p.488)
  • Lack of property rights can lead to inefficiently high overuse (tragedy of the commons) - biggest concerns are those that aren't owned by even governments - seas and air.
  • With I=R/yL where L = population, I = resource intensity R = resource consumption and thus R-hat=I-hat+y-hat+L-hat.
  • Can rework GDP accounts to include 'natural capital' and therefore account for the limited natural resources, were resource prices are adjusted to account for future externalities (q: are prices correlated with scarcity?)
  • Economics needs scarcity to be reflected in factor prices which it currently isn't.
  • Environmental Kuznets curve argue that initial development worsens the environment but in the long-run its better. Could potentially be gains from trade re: pollution
  • Global Warming - simple solution carbon tax.

Predictions

Evidence

  • There is a strong positive correlation between distance from the equator and gdp/capita, where although countries near the equator can be poor, countries far from the equator never are.
  • Positive correlation between natural capital and GDP/capita. Growth rates are negatively correlated with natural capital that makes up large proportion of the share of national wealth.
  • If oil reserves are estimated at 3.0 trillion barrels we have already used 39% and at that rate all the oil will be gone in 61 years. And if usage continues to grow at 1.6% a year (the average rate from 1983 to 2010) all the oil will be gone in 43 years

Evaluation

  • Geography/natural resources do not suffer from reverse causality.
  • Natural resources are not essential for economic growth and they may actually be a hinderance.
  • Resource constraints can be overcome by 1. substitution (SR this is hard, in the long run substitutes are found) and 2. technological progress