Natural Resource Wealth and Directed Technical Change

This paper analyses the e¤ect of endogenous directed technical change in a resource-rich economy, embedding a version of Acemoglu’s model of directed technical change in a three-by-three trade theory model. Technical progress depends on entrepreneurs who either produce or adopt technology, and who endogenously choose which sector to operate in. The static e¤ect of a resource discovery is de-industrialization and a rise in non-resource factor incomes, as in standard trade theory. The dynamic e¤ect is to exacerbate the deindustrialization over time, but unless the discovery is large enough it leads to lower growth in non-resource factor incomes, which in the long run are lower than in the absence of the resource discovery. Thus if natural resources are owned by the government and other factors are owned by the private sector, then real private sector income may grow more slowly in a resourcerich economy than a resource-poor economy.