The Role of Natural Resources in Economic Development

In recent years economists have recognized that, along with physical and human capital, environmental resources should be viewed as important economic assets, which can be called natural capital. However, the services provided by natural capital are unique. They include the use of resources for material and energy inputs, the "assimilative capacity" to absorb waste, and the provision of ecological services. The latter services are particularly not well understood, and lie at the heart of the debate over the role of natural capital in sustainable development. That is, does the environment have a unique or "essential" role in sustaining human welfare, and if so, are special "compensation rules" required to ensure that future generations are not made worse off by natural capital depletion today? A further debate has emerged over whether environmental degradation in an economy may initially increase, but eventually declines, as per capita income increases. This hypothesis, called the environmental Kuznets curve (EKC) has led to a number of attempts to estimate empirically an "inverted U" shaped relationship between a variety of indicators of environmental pollution or resource depletion and the level of per capita income. Finally, recent economic theories and empirical evidence have questioned whether poorer economies that are endowed with abundant natural resources develop more rapidly than economies that are relatively resource poor. It is possible that resource abundant economies are not reinvesting the rents generated from natural resource exploitation into productive assets, or that resource booms actually divert economic resources from more productive and innovative sectors. The result is a "boom and bust" pattern of economic development. There is evidence of this phenomenon particularly with regard to economic development and land expansion, especially in Latin America. Overall, although our understanding of the role of natural resources in economic development has improved markedly in recent decades, there is still much to learn. How natural resource depletion is affecting the ecological services provided by the environment is one concern. In the case of the poor economies, there is increasing evidence that their prospects for economic "take off" are being adversely affected by the lack of efficient and sustainable management of their natural resource base. Yet the "underpricing" and "undervaluing" of natural capital makes it difficult to design appropriate policies for ensuring that natural resource rents are reinvested in other productive assets of the economy.