Hartwick Rule
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Transcript of Hartwick Rule
Take Home Assignment Essay
Topic 1 – “The Hartwick rule is useless for daily policy making.”
Prepared for Module CB9008
“Natural Resource Economics”
by
Carlos Ferreira
Submitted on the 30th March, 2009
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We consider that the production function for a society follows a Cobb-Douglas form
with constant returns to scale:
Qt = KtαRt
β , + α = 1β
Where Q represents quantity produced (and, therefore, consumed), K represents
the amount of capital used and R represents the amount of a non-renewable natural
resource used. Being non-renewable, usage of R presents the problem of compromising
future production, due to depletion.
The equation shows that the quantity of R can be almost indefinitely substituted for
capital to maintain a constant level of production over time, As long as > . constantα β
production could result if a specific savings rule the Hartwick rule was applied: that at– –
every point in time the total rent arising in the resource extracting industry be saved and
invested in reproducible capital. This unit rent is the difference between the marginal cost
of extraction and the market price for the resource. These rents are the result of the
Hotelling rule, which predicts that efficient depletion will produce a rent when the resource
is non-renewable. This rent is proportional to the resource's scarcity it increases over–
time, as the resource becomes scarcer.
The Hartwick rule is essentially a behavioural constraint it forces the saving and–
investment of rents in the interest of society at large. Its predicted result is that the total
amount of capital in an economy (natural capital, measured by the amount of the non-
renewable available, plus reproducible capital physical, human and social) is not–
diminished, and therefore production possibilities remain the same indefinitely. Utility,
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measures from consumption could be maintained over time; this would be a measure of–
intertemporal equity (Perman et al., 2003; Hanley, Shogren & White, 2007).
Abstract as the model may seem, there are important consequences to the Hartwick
rule for policy-makers, and indeed some attempts have been made with positive results.
Applying it requires a fundamental change to the concept of economic development;
instead of a game of GDP increase at all costs, development should be conceptualised as
a process of portfolio management , whereby each asset is optimally managed and the“ ”
wealth is distributed among the different kinds of assets, to maintain or increase wealth per
capita over time.
Lange (2004) compares the evolution of per-capita wealth in two African countries,
Botswana and Namibia, similar in many aspects (size, population, geography and climate)
but different when it comes to management of natural capital: the former features an
explicit policy of reinvestment of all resource rents and an indicator to measure this policy –
the Sustainable Budget Index, which roughly follows the Hartwick rule while the later has–
no specific policies of reinvestment, and has based its GDP growth partly in resource
depletion. Both countries depend heavily on the extraction of natural resources: in
Botswana, mineral exports account for 35% of GDP, 75% of exports and 50% of
government revenue, while in Namibia the combination of mineral and fisheries exports
account for 20% of GDP, 85% of exports and 10% of government revenue.
By using measures derived from the System of Integrated Environmental and
Economic Accounts (SEEA), the study includes measures of natural capital (minerals and,
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where relevant, fisheries), produced capital (private and public) and net foreign financial
assets. Indirect measures of human capital such as illiteracy rates and response to HIV/–
AIDS epidemics are also included.
Taking 1980 as a baseline, Botswana has managed its mineral resources in such a
way that resulted in a five-fold increase in net present value, although 25 to 30% of known
reserves have been extracted. This has been achieved by increasing production over time,
hence discounting less future rents. By contrast, Namibia has suffered similar depletion
rates and has seen its net present value of minerals diminish because of no explicit
investment of resulting rents. Similarly, its fishery resources have been depleted heavily,
and stocks have fallen to a point where recovery becomes difficult.
Equally, the investment of rents has allowed Botswana to increase its produced
capital (both public and private) in the time frame considered, while Namibia has seen a
result in public and private produced capital. Likewise net foreign capital assets: Botswana
has seen an increase of over forty-fold, while in Namibia's case these assets are
frequently negative.
The results of this reinvestment policy (or lack thereof) are clear: Botswana has had
the capacity to invest heavily in reducing the illiteracy rates and, even though it has the
second largest HIV infection rates in the world, it also sports Africa's most efficient and
effective programs to fight the infection and distribute anti-retroviral drugs to the population
(Leithead, 2004), therefore increasing life expectancy and maintaining its stock of human
capital for longer (Langer, 2004). In contrast, Namibia is limited by its lack of capital, and
although the illiteracy rate has dropped in this period, the investment in fighting the HIV
epidemics has been smaller, resulting in Namibia also shedding a large amount of its
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human capital.
On the face of difficult conditions and fighting an epidemics that affects over 25% of
its adult population, Botswana has managed to develop from being one of the world's
poorest countries in 1966 to becoming a World Bank recognised Upper-middle-income
country in the 1990's. By contrast, Namibia adopted no such policies and has liquidated a
large amount of its capital. As a result, its wealth per capita has fallen dramatically, from
being 75% larger than Botswana's to only around one third of that country's by the end of
the 1990's.
It seems clear from this example that the Hartwick rule has important policy
consequences, and should be observed. In the contest between development and
conservation, the best answer is frequently to allow for a socially optimal depletion of
natural resources and invest the resulting rents to ensure total amount of capital in a
certain society does not diminish. Unfortunately, failing to develop policies based in the
Hartwick rule has frequently resulted in the so-called resource curse .“ ”
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References
● Hanley, N., Shogren, J. F. & White, B. (2007). Environmental Economics in Theory
and Practice. Hampshire: Palgrave Macmillan.
● Lange, G.-M. (2004). Wealth, Natural Capital, and Sustainable Development:
Contrasting Examples from Botswana and Namibia. Environmental & Resource
Economics, 29, pp. 257 283.–
● Leithead, A. (2004). Hope out of pain: Botswana's AIDS Story. [Internet], BBC News
World/Africa. Available from <http://news.bbc.co.uk/1/hi/world/africa/3889205.stm>
[Accessed 28 March 2009].
● Perman, R., Ma, Y., McGilvray, J. & Common, M. (2003). Natural Resource ans
Environmental Economics. Harlow: Pearson Education.
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