Optimal saving policy for exhaustible resource economies

Abstract

The paper examines the optimal saving policy for a small exhaustible resource-exporting economy (ERE) that has an exhaustible asset and a reproducible capital stock. It shows that, both in magnitude and time profile, the optimal saving policy for an ERE sharply differs from (a) that of a nonextractive economy and (b) that derived from the conventional models of growth with exhaustible resources. These differences arise from the specific economic features that distinguish the small resource-exporting developing economies both from other developing economies and from mature industrial ones. For a wide range of plausible parameter values, comparisons of computed optimal saving paths with actual savings rates of selected EREs suggest substantial deficiencies in their savings rates.