This paper extends the World Bank's Long-Term Growth Model (LTGM) with the addition of a natural resource sector to analyze how long-run growth evolves in resource-rich countries and the growth impacts of price shocks and resource discoveries. In the LTGM-Natural Resource Extension (LTGM-NR), commodity price shocks affect long-term economic growth through physical investment rates. As a large share of resource income typically accrues to the government, the size of the boost to investment in a price boom depends on the government’s fiscal rule. Fiscal rules that prioritize public investment, like a Hartwick Rule, generally lead to the largest increases in long-term growth. However, structural surplus rules, which save commodity revenues, can also boost growth if they free up savings for private investment. The response of growth to discoveries of natural resources is similar to the response to price shocks, although discoveries also produce a direct effect on real GDP, in addition to an indirect effect through investment. The LTGM¬-NR also captures the effect of other (non-resource) growth fundamentals in resource-rich economies, and it is better suited to general growth analysis in these countries than the standard LTGM. However, the LTGM-NR is a supply-side model, and so does not capture the short-run effects of price and discovery shocks that operate through aggregate demand.
Details
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Author
Loayza,Norman V., Galego Mendes,Arthur, Mendez Ramos,Fabian, Pennings,Steven Michael
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Document Date
2022/03/14
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Document Type
Policy Research Working Paper
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Report Number
WPS9965
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Volume No
1
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Total Volume(s)
1
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Country
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Region
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Disclosure Date
2022/03/14
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Disclosure Status
Disclosed
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Doc Name
Assessing the Effects of Natural Resources on Long-Term Growth : An Extension of the World Bank Long Term Growth Model
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Keywords
development research group; private investment; oil sector; oil price; fiscal rule; million barrels of oil; labor share; long-run growth; labor force participation rate; composition of government expenditure; investments in energy infrastructure; ratio of government consumption; real gross domestic product; marginal product of capital; real gdp; commodity price shock; natural resource sector; reserves of oil; oil reserve; neoclassical growth model; standard neoclassical model; price of oil; lower interest rate; current account balance; private external debt; geological survey; value of exports; total external debt; international capital flow; effect of price; long-term economic growth; long-term growth; Natural Resources; primary balance; gross domestic income; high oil price; number of workers; total factor productivity; price of export; long term growth; fast population growth; commodity price fluctuation; public external debt; government fiscal policy; high population growth; private saving rate; exports of oil; change in revenue; commodity-exporting countries; drag on growth; windfall oil revenue; increase in debt; world interest rate; oil price increases; distribution of oil; point of departure; share of resource; high oil revenue; stock of capital; engine of growth; high growth rate; marginal revenue product; exhaustible natural resource; determinants of growth; resource revenue; aggregate demand; oil exporter; fiscal surplus; public debt; working-age population; demographic trend; initial capital; exogenous variable; Oil Income; time sery; investment rate
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Citation
Loayza,Norman V. Galego Mendes,Arthur Mendez Ramos,Fabian Pennings,Steven Michael
Assessing the Effects of Natural Resources on Long-Term Growth : An Extension of the World Bank Long Term Growth Model (English). Policy Research working paper,no. WPS 9965 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/584811647268984881/Assessing-the-Effects-of-Natural-Resources-on-Long-Term-Growth-An-Extension-of-the-World-Bank-Long-Term-Growth-Model