Resource depletion and economic sustainability in Malaysia

Abstract

Countries richly endowed with natural resources have, on average, developed less rapidly than countries that are poor in natural resources. One possible explanation for this phenomenon is that the level of investment in reproducible capital has been insufficient to offset the depletion of natural capital. The empirical significance of this explanation can be investigated by analysing modified measures of net investment and net domestic product. Estimation of these measures involves calculating the economic depreciation of natural resources, a task that has been problematic in previous studies. Malaysia provides an ideal case for such empirical investigations, as it is one of the world's most resource-rich countries yet also has one of the world's fastest-growing economies, consists of three subnational regions that differ significantly in terms of economic structure, and has sufficient data for estimating conceptually correct measures of natural resource depreciation. Results of the analysis indicate that Malaysia has developed sustainably, despite substantial resource depletion. This is not the case in two of the regions, however, where trends in both net investment and net domestic product indicate that current consumption levels cannot be sustained. Nevertheless, the regional differences in sustainability might be consistent with optimal national use of the rents generated by exploitation of the country's natural resources.