Nonrenewable resources, Income Inequality and per Capita GDP: An Empirical Analysis

# 1. Introduction and Literature Review

A large body of literature has examined the relationship between natural resources, economic growth, and income inequality, revealing a set of complex and often ambiguous associations. The relationship between natural resources and economic growth is especially controversial. On the one hand, general economic theory suggests that a booming natural resource sector will boost economic growth, and that it will facilitate— though not necessarily cause—improvements in poverty and shared-prosperity indicators. Ideally, rising natural resource output would increase public revenues, enabling greater public investment in physical and human capital, while the private returns to resource production would encourage greater private investment (both domestic and external), as well as higher rates of household savings. On the other hand, the substantial literature on the so-called “Dutch disease” finds that a resources boom can divert resources away from the non-resource tradable sectors (especially manufacturing), distort the growth of nontradables (especially services), and put upward pressure on the exchange rate. These effects erode the competitiveness of exports and give imports an advantage over domestic production, undermining long-term growth (Sachs and Warner 1999).

The World Bank (2012) analyzed the impact of natural capital<sup>4</sup> on income by examining the adjusted net savings of resource-rich countries. It found that the sustainable management of natural resources has a positive and significant correlation with economic resilience and welfare gains. The World Bank analysis underscored that the elements of natural capital cannot be managed in isolation, but require an integrated approach to “regulating” and “provisioning” natural resource exploitation in order to preserve the underlying stock of natural capital.

Other studies have focused on the depletion of natural resources. Dasgupta (2010) concludes that GDP per capita and the Human Development Index (HDI) should not be regarded as comprehensive indicators of economic and social welfare, as they do not reflect the depletion of the natural capital stock, and that more sophisticated forms of wealth accounting that include produced, human and natural capital are more appropriate measures of inclusive and sustainable development. The World Bank has long been a major advocate for integrating the sustainable management of natural capital into growth strategies. Cleveland et al. (1996) analyzed the relationship between natural capital, ecosystem services and economic growth, highlighting that economic growth models tend not to account for either the degradation of critical, non-replaceable ecosystem services or the depletion of natural capital. The study concludes that these elements should be taken into account in future analyses of the link between natural capital and growth.

In recent years increased attention to the issue of income inequality has added a new dimension to the debate over the role of the depletion of natural capital in economic growth and development. Barbier (2014) argues that understanding the depletion of natural capital is crucial to assessing both the extent to which natural capital will

> 4 Natural capital includes both nonrenewable resources such as oil and minerals and renewable resources such as arable land, forests and fisheries, as well as environmental quality.

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