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A Survey. langmaack und M. Paul. VII, 280 Seiten. 1972. VI, 137 pages. 1974. continuation on page 165 Lecture Notes in Economics and Mathematical Systems Managing Editors: M. Beckmann and W. Krelle 200 The Resource Sector in an Open Economy With contributions by K. Enders, E Gerken, H. Herberg N. Van Long, M. G. Porter, H. Siebert Edited by Horst Siebert Springer-Verlag Berlin Heidelberg New York Tokyo 1984 Editorial Board H.Albach A.V.Balakrishnan M.Beckmann (Managing Editor) P.Ohrymes G.Fandel J.Green WHildenbrand WKrelle (Managing Editor) H. P. KLinzi G. L. Nemhauser K. Ritter R. Sato U. Schittko P. Schonfeld R. Selten Managing Editors Prof. Dr. M. Beckmann Brown University Providence, RI 02912, USA Prof. Dr. W. Krelle Institut fUr Gesellschafts-und Wirtschaftswissenschaften der Universitat Bonn Adenauerallee 24-42, 0-5300 Bonn, FRG Editor Prof. Dr. Horst Siebert Universitat Mannheim, A 5 - Seminargebaude 0-6800 Mannheim 1, FRG ISBN-13: 978-3-540-12700-0 e-ISBN-13: 978-3-642-46484-3 001: 10.1007/978-3-642-46484-3 This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically those of translation, reprinting, re-use of illustrations, broadcasting, reproduction by photocopying machine or similar means, and storage in data banks. Under § 54 of the German Copyright Law where copies are made for other than private use, a fee is payable to "Verwertungsgesellschaft Wort", Munich. © by Springer-Verlag Berlin Heidelberg 1984 2142/3140-543210 Preface " the economics of exhaustible assets presents a whole forest of intriguing problems." Harald Hotelling1) The two energy price shocks in 1973/74 and 1979/80 have arosed interest in the new area of resource economics. The affluent societies of Europe, North America and Japan were confronted with the new scarcity paradigm of the "space ship earth" with only a limited supply of natural resources aboard whereas population is growing and the environment can not accomodate the increasing volume of pollutants. The problem of natural resource scarcity gives rise to the question how resource-dependent economies like European coun tries and Japan are affected by an increase in resource prices and how they can adjust to rising energy prices. The new para digm also has focused new interest on the problem of the re source-extracting firm and of the resource-exporting country. The Hotelling revival of resource economics has given new im portance to the behavior and to the policy issues of resource exporting countries. In this volume, some important economic problems of the resource-exporting country are addressed. In Chapter I, a survey on the impact of the resource sector on the economy is given in a comparative-static framework. Moreover, the allo cation problem of a resource-exporting country is analyzed in an intertemporal context. Should the resource-rich country de plete its resources quickly or should the time profile of ex- 1) H. Hotelling (1931), The Economics of Exhaustible Resources, "The Journal of Political Economy", 39 (1931), 137-175. IV traction be chosen in such a way that depletion is postponed? The notion of an optimal intertemporal depletion policy is a baseline for the taxation of natural resources. The resource rich country should institutionalize such a taxation scheme that the long-run interest of the resource-rich country is taken into account. This issue is discussed in Chapter IV by Porter. The comparative-static allocation problem of how the resource sector affects the rest of the economy is taken up in Chapters II, III and V. Long (Chapter II) and Herberg and Enders (Chapter III) discuss how a resource boom influences the sectorial structure of the economy. Gerken (Chapter V) analyzes the reverse case how a fall in the world price of natural resources bears upon the economy of a resource-rich country. The papers of this volume have been presented in a seminar of the research group (Sonderforschungsbereich 5) "Allocation Policy in a Market Economy" at the University of Mannheim, Federal Republic of Germany. The Sonderforschungsbereich is sponsored by the Deutsche Forschungsgemeinschaft and attempts to find an answer to the laws governing allocation in a mixed economy. What is the optimal division of labor between the private and the government sector? Among different regions and industries of a nation? Among different nations? How can one discriminate between competing uses of factors of production? What are the opportunity costs (or user costs) to use a re source or a commodity for a specific purpose? Which allocation problems arise for specific resources such as labor, capital, land, natural resources and the environment? vlliich mechanisms and rules steer the allocation among generations? Do externalit ies require new property rights or do they necessitate govern ment intervention? Does government intervention cause dis tortions and misallocations? I would like to thank M. Corden, L. Cox, M. Faber, A. V. Kneese, N. V. Long, H. K. Schneider and I. Walter for arising v and enforcing my interest in natural resources. Financial sup port from the Deutsche Forschungsgemeinschaft is gratefully acknowledged. I am also grateful to my collaborators at the University of Mannheim F. Dudenh5ffer, H. Gebauer, J. Keck, H. Meder, A. Meyer, A. Seubert, and S. Toussaint who always ask the stimulating questions. Finally, I would like to thank E. Dreyer and J. Schafranek for preparing the manuscript for publication and A. Seubert for addressing himself to the index. Horst Siebert About the Authors Klaus Enders is an economist in the department of economics at the University of Kiel, Institut fur Theoretische Volks wirtschaftslehre, Olshausenstr. 40-60, 2300 Kiel 1, Federal Republic of Germany Egbert Gerken is a senior staff member at the Institut fur Volks wirtschaft an der Universitat Kiel, Dusternbrooker Weg 120, 2300 Kiel, Federal Republic of Germany Horst Herberg is Professor of Economics at the University of Kiel, Institut fur Theoretische Volkswirtschaftslehre, Olshausenstr. 40-60, 2300 Kiel 1, Federal Republic of Germany Ngo Van Long is Professor of Economics at the Australian National University, Department of Economics, Copland Building, G.P.O. Box 4, Canberra 2601, Australia Michael G. Porter is Professor of Economics and Director of the Centre of Policy Studies at the Monash University, Clayton Victoria 3168, Australia Horst Siebert is Professor of Economics and International Trade at the University of Mannheim, A 5, 6800 Mannheim, Federal Republic of Germany Contents I. Allocation Policy in a Resource-Exporting Country Horst Siebert 1. The Role of Resource Exports 1 2. The Impact of the Resource Sector on the Economy 3 3. Intertemporal Allocation 5 3.1 IntertemporalOptimality 5 3.2 Factors Influencing Intertemporal Supply 7 4. Some Policy Issues 10 II. On the Short-Run and Long-Run Effects of a Resource Boom 17 Ngo Van Long 1. Introduction 17 2. Possible Causes of a Resource Boom 18 3. Short-Run Effects of a Resource Boom 20 3.1 Model 1: The Transfer-Equivalent Effect of a Resource Boom 21 3.2 Model 2: The Direct Resource-Pull Effect of an Export Boom 25 3.3 Model 3: Real Wage Inflexibility 29 4. Some Long-Run Considerations 39 5. Concluding Remarks 44 III. More on the Consequences of a Resource Boom and the Cures of the Dutch Disease 47 Horst Herberg und Klaus Enders 1. Introduction 47 2. The Model 51 2.1 Notation 51 2.2 Assumptions 52 2.3 Some Basic Relationships 57 3. Consequences of a Resource Boom 59 3. 1 The Case of a Resource-Output Boom 59 3.2 The Case of a Resource-Price Boom 64 VIII 4. Policies Against Adverse Boom Effects 72 4.1 Demand Policy 73 4.2 Wage Policy 74 4.3 Devaluation 79 4.4 Resource-Price Subsidy 81 4.5 Production-Cost Subsidy 82 4.6 Import Tariffs 85 5. Extensions and General Conclusions 90 IV. Taxation of the Australian Resource Sector 95 Michael G. Porter 1. Some Institutional Background 95 2. Mineral Profits, Taxation and Riskiness 101 3. Mineral Exports - Impact on other Sectors 104 4. Taxation and the Sale of Mineral Leases 105 5. The Objectives of Taxation Policy 107 6. Auctioning of Leases versus Resource Taxation 110 7. Exhaustability and Taxation 110 8. Bonanzas 112 9. The Northern Territory - The Proposed Mineral Royalty Bill 113 10. Conclusion 114 V. Diversification and Stabilization in a Resource Exporting Country 117 Egbert Gerken 1 • Introduction 117 2. Disturbances in a Small Commodity Exporting Country 120 2.1 The Case of Flexible Exchange Rates 120 2.2 The Case of Fixed Exchange Rates 121 2.3 Gains and Losses from a Diversification Policy 123 3. Analytical Framework 124 3.1 Sector Disaggregation 126 3.2 System of Equations 128 3.3 Experiments 130 IX 4. Results 132 4.1 Export Diversification 132 4.2 Instability under Flexible Exchange Rates 136 4.3 Opportunity Costs of Stabilization under Fixed Exchange Rates 138 4.4 Instability under Fixed Exchange Rates 139 5. Summary and Conclusions 140 Author Index 156 Subject Index 158