Should natural resources be publicly owned?

Natural resources are a special kind of property, because in a sense they belong to the public. But their extraction is also possible by private corporations. There are in fact pros and cons to both. Private ownership has been shown to be more efficient and more profitable. But public ownership may be better at benefiting the region or country the resources are located in.

Of course, efficiency and profitability are important, but a country’s goal should be to maximize the welfare of its citizens. So what happens if we take a look at the effects of resource ownership on economic growth? Is private ownership still preferable to public ownership?

Borissov and Pakhnin (2014) address this question using a classical growth model. Suppose that output in the economy is dependent on capital, labor and the amount of resources extracted. Obviously, the resource stock is finite. Households differ by how patient they are (i.e. how much they value the future vs. the present). And the ownership of resources can be either private or public.

Private ownership is simple: resources act like just another asset that can be invested in (i.e. just like capital). The more households decide to “invest” in resources, the more resources will be extracted. Public ownership is modeled by assuming that the revenues from resource extraction are equally distributed among the population and thus act as an additional source of income to all households. The rate of resource extraction is decided upon by voting.

The key feature of the private ownership economy is that in the long run, the most patient households will end up being the only ones who save/invest. So these households will own all the capital and resources. This makes sense, as both capital and resources have a kind of return that pays off in the future. So more patient agents will always be willing to pay more for these investments.

Now, since only the most patient agents own the resources, the extraction rate of the resources will depend on these agents’ preferences. And these agents are very patient, so resource extraction will be low in order to avoid early resource depletion. This will ensure a higher growth rate over a long-term horizon.

What happens in the public regime? Here, resource revenues are equally distributed among households, and households vote on the extraction rate. It turns out that the median voter theorem applies, which means that the median household’s preferences will determine the outcome of the vote. Households only differ by patience, so the median household is quite likely not the most patient household. This means that the extraction rate will likely be higher than in the private regime, and long-term growth will thus be lower.

If it just so happens that the most patient agents are the majority (this is more of a theoretical curiosity rather than a realistic possibility), then the long-term growth rates will be equal for the two regimes, as the median household(s) will also be the most patient ones.

But of course, we’ve only considered a very simple framework that could be extended in various ways. Let us consider one such way. In a private ownership regime, inequality will be higher because resources are owned exclusively by the most patient households. And inequality may be detrimental to economic growth. Inequality can lead to social tensions and instability. One of the biggest threats that can come out of this is uncertainty over property rights, i.e. a risk of expropriation.

If there is such a risk then privately owned mines may decide to start extracting resources more quickly in order to make as much profit as possible in a short period of time. This is because they never know when they might lose their property.

This effect will obviously lower the long-term growth rate. In fact, if the most patient agents are the majority (not going to be the case in reality), then the public regime now leads to a higher growth rate than the private one. If the most patient agents are not the majority, then the public regime is likely to be better than the private one only if inequality is particularly high.

The table below summarizes all the results discussed so far. PU denotes the public, PR denotes the private regime. The cases in gray font are unlikely in reality.

Private vs. public ownership for natural resources

So we can see that as long as inequality does not have an effect or if inequality is low, then the private regime is preferable. In countries with high inequality the public regime seems to do better.

I think the major caveat of this model – as of most economic models that have a government – is that it assumes that the government works in the interest of the people and it redistributes resource revenues nicely and equally. Unfortunately, this is unlikely to hold true exactly in those high inequality countries that would need a public ownership regime. I’m thinking of resource-rich developing countries where the governments are generally very corrupt.

But of course, this doesn’t invalidate the findings of this paper. It just limits the scope of its practical applicability. To the extent that there are high inequality countries with reasonable not-too-corrupt governments, a public regime can be a better option even in practice. For the case of highly corrupt countries, this model would need to be further extended in order to study the effects of the two property regimes.

The paper is purely theoretical, so its insights are qualitative. Interesting future work could look at the quantitative effects such as how big the growth difference is between the two regimes, or exactly how high inequality needs to be in order for a switch to a public regime to be beneficial.

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