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| Will slower population growth increase the growth ~ rate of per capita income through increasing per capita availability of exhaustible resources? MARKETS AND NATURAL RESOURCE PRICES In congest to resources like agricultural land that can, in principle, remain productive in perpetuity if properly managed, Me ear~'s crust has a finite supply of such resources as fossil fuels and nonfuel minerals. These resources are partially destroyed, or at least substantially transformed, in the production and consumption of Me economic goods and services that use ~em, so that We world's stock declines. Although recycling can partly offset this decline- for example, the world steel industry now uses scrap iron to satisfy 45 percent of its iron requirements (Chandler, 19840for practical purposes, the potential flow of economic services from exhaustible resources is limited because the stock is finite. Perhaps because of Me evident scarcity of the earth's resources, institutions governing property rights to Me most important exhaustible resources have a long history. Market mechanisms are the most important institutions for allocating resources among users, and even in societies win nonmarlcet economic systems, world market conditions exert an important influence on resource allocation decisions. Market prices, ~en, are important in determining how resources are used, including how much is retained for future use. The market price of an exhaustible resource is determined by bow supply and demand. Demand for a resource is derived from the demand for the goods it is used to produce. Ike derived demand therefore depends on population, income level, the relative price of He goods, and the technological feasibility 11
12 POPULAJ7ON GROWTH AND ECONOMIC DEVELOPMENT and price of substitutes for either the resource or the goods. If other things are constant, an increase in either population or income will tend to boost the demand for a resource, though die demand for some goods will be more sensitive to population and the demand for others more sensitive to income. On the supply side, there are two components to producers' costs. Extraction costs reflect We labor and capital required to supply a unit of the resource for production, which generally increases as the stock of the resource declines, although improvements in extraction technology may slow the rate of the increase. For example, the development of heavy earth-moving equipment reduced the price of copper by making it easier to extract lower ore grades (Slade, 1985~. The other component of producers' cost of a resource reflects the rate of return to the resource stock considered as a capital asset, comparable to a market interest rate. Thus, if there is an increase in the expected future demand for a good requiring Me resource, the value of the economic services that can be provided by Me resource stock will also increase, an implicit capital gain that will be reflected in the rate-of-retum component of the market price. Current and expected future prices drive the search for additional reserves of a resource, for substitutes, and for conservation measures. There is reasonably good evidence that the availability of many resources is quite sensitive to price. For example, Me U.S. Burt of Mines has estimated Mat domestic mercury reserves are 1,600 metric tons if the pace is $2,900Jton but are 50,000 metric tons if the price is $43,500fton (Goeller and Zucker, 1984~. Conservation and substitution activities are also price sensitive, as evidenced by reactions to the increase in fossil fuel prices dun ng the 1970s. In both developed and developing countries, the grown in energy inputs required for production had declined sharply by the latter part of the decade (MacKellar and Vining, 1985~. Similarly, in 1972, U.S. annual energy consumption was projected to be 160 quads (a unit of energy) by the year 2000, but in 1982 that projection was only 95 quads (Furor and Portney, 1982:200~. When Zaire, producer of more than half of the world's supply of cobalt, reduced its allotments to customers by 30 percent, prices rose from $11Jkg to $35/kg. But this price increase led to such extensive introduction of substitutes (e.g., manganese and lead in paints) that U.~. consumption of cobalt in turn fell by one-half (Goeller and Zucker, 1984~. In a setting with perfect competition and perfect capital markets, whose participants accurately anticipate future supply and demand conditions, prices will efficiently allocate resources among altemadve uses and over time, in the sense that no individual in any generation could be made better off without someone else being made worse off. In formulations that demonstrate this result, fixture prices are discounted at the market rate of interest, which incorporates the premium that must be paid to agents to defer current
EXHAUSTIBLE RESOURCES 13 consumption until some point in the future (Smith and Krutilla, 1979~. this context, since the current price of an exhaustible resource reflects the fact that the stock is an asset that could be sold at a capital gain in the fixture, the resource will be depleted optimally. Of course, the conditions ensuring intertemporally efficient resource allocations are unlikely to be satisfied precisely. Particularly unrealistic is the condition of perfect fores~ght-that current market participants correctly anticipate the future course of supply and demand so that the spot price of a resource at any time is linked to all future pnces. It is through this indirect mechanism that future generations are represented in the market, since a high anticipated future price increases the current value of a resource stock, also increasing the current pnce. To the extent that present-day speculators underestimate future demand, stocks will be drawn down too rapidly (and conversely for overestimates of future demand). It is debatable whether government perceptions of future supply and demand can be more accurate than market perceptions, a condition that would justify government intervention. Long-run predictions are clearly difficult. Reflection on Me past century's economic history suggests that unanticipated changes in tastes and technology drastically shifted the configuration of "essential" resources. Such shifts in the future, combined with capital market imperfections, would result in inefficient intertemporal allocation of resource consumption, though it is impossible to predict a prion whether the result would be overconservation or underconservation. Monopoly is another source of market failure. Because of the geological processes that produced them, some fuel and nonfuel minerals may be concentrated geographically so that stocks may be held by relatively few organizations or countries. For example, while world coal deposits are relatively uniformly distributed, oil deposits are not (MacKellar and Vining, 1985~. When He stock of an exhaustible resource is monopolistically controlled, the market price will be higher than it would be under more competition. Because a higher price will result in decreased demand, if all else is equal, He effect of monopolistic distortions will tend to bias intertemporal allocations toward resource conservation (Dasgupta and Heal, 1979). But despite these imperfections, many economists believe that actual markets come closer to producing such an efficient outcome than any other institution and Hat results in actual markets tend toward or approximate the results obtained in He pure case (Stiglim, 1979; Dasgupta and Heal, 1979~. For example, when the Organization of Petroleum Exporting Counties (OPEC) cartel imposed oil price increases in the 1970s, the ensuing expansion of supply, substitution of alternative energy sources such as natural gas and coal, and conservation measures reduced the demand for OPEC oil enough
14 POPU1~17ON GROWTH AND ECONOMIC DEVELOPMENT to significantly diminish the cartel's price-seuing power. The physical characteristics of a resource may make property rights difficult to define practically, potentially distorting the efficiency of markets. But when a resource is economically important, there are powerful incentives to establish effective rules governing access to it through negotiation or other social institutions. For example, underground oil reservoirs may extend beneath land owned by many different persons or agencies. To maximize individual revenues, each individual oil producer would be motivated to pump oil as rapidly as possible, even though this would damage the deposit and reduce the total amount available for extraction. Despite the difficulties of establishing ownership rights to the pool itself, oil producers and governments have constructed elaborate systems of allocating a particular field among claimants that approximate the efficient market outcome (Dasgupta and Heal, 1979~. To summarize, because virtually all economically important exhaustible resources are allocated by markets or by nonmarket social institutions that approximate market processes, the increasing physical scarcity of a resource wilt be reflected in increases in its price. In turn, price increases tend to stimulate conservation, improvements in extraction technology, and the search for less expensive substitutes. If these responses are successful, the resource becomes economically less scarce, tending to stem price increases. Thus, the absence of any long-term trends toward increasing real prices of exhaustible resources has been ir..erpreted as contradicting the hypothesis of growing scarcity (Simon, 1981; Simon and Kahn, 1984; Barnett et al., 1984), although others find some evidence of a U-sha~ price trend attributable to increasing extraction costs (Slade, 1982~. For instance, iron, copper, and silver declined in price over the period 1890-1930, but have risen since. Aluminum trended downward over 189~1980, and tin upward, while lead and zinc remained constant (Slade, 19821. Exhaustible resource depletion does not seem likely to constrain world economic grown in the foreseeable future. Nonfuel minerals represent only 1.2 percent of Me total value of world production (Goeller and Zucker, 1984), and a long-term resource requirement study suggests Hat depletion of significant nonfuel mineral resources is unlikely ~ontief et al., 1983~. The heavy dependency of the world economy on conventional petroleum resources may pose a more immediate risk, but the potential supply of nonconventional petroleum from sources such as oil shale, and from relatively close substitutes for oil, such as coal and gas, is immense (MacKellar and Vining, 1985~. Ultimately, the depletion of energy resources will continue until it becomes economical to rely directly on sunlight, an inexhaustible source of energy. This time may come sooner than fonnerly believed because of technical advances in the production of photovoltaic cells (Flavin and
EXHAUS17BrF RESOURCES IS Postel, 1984), although there are also more skeptical views on the ability of direct solar power to satisfy the energy requirements of current, energy- intensive technology (Beckmann, 1984~. POPULATION AND EXHAUSTIBLE RESOURCES Although He central focus of this report is the impact of population growth at the country level, He scope of this discussion of exhaustible resources is at a global level because of Be nature of resources. The extensive international We in fossil energy and nonfuel mineral resources means that any effects of increased demand due to population growth in developing counties will be experienced in world markets, affecting all nations. For example, countries Cat are net exporters of resources may be worse off with a reduction in resource demand due to lower population grown, even if there is a global increase in consumption per head. And globally efficient resource use may involve international agreements on truces, subsidies, and transfers. With continuing depletion, the global stock of a finite resource will vanish. The rate at which the stock is depleted depends on the rate of population grown, income levels, and perhaps most important, on He success of the price-induced search for more efficient ways to extract and use the resource in the production of goods for final consumption. The rate of population grown, in itself, bears no necessary relationship to the rate of depletion. Indeed, He fact that exhaustible resource consumption is highest in economies with high income levels (Slade, 1985) means that the trends in demand for resources in developed countries may be much more important in determining the rate of global resource use than the trends in developing countries. Furthermore, a world with a regime of very rapid population grown but slow increases in income might experience slower resource depletion than one with a stationary population but rapid increases In income. Moreover, even if slower population growth does delay the time at which a particular stage of resource depletion is reached, which seems likely, it has no necessary or even probable effect on the number of people who will live under a particular stage of resource depletion. Under the implausible assumption (for the reason given above; also see Koopmans [19743) of constant per capita resource use up to the point of resource exhaustion, the rate of population growth has no effect on the number of persons who are able to use a resource, although it does, of course, advance the date at which exhaustion occurs. Approximately the same result would hold under other, more plausible regimes in which price effects are introduced. Unless one is more concerned with the welfare of people born in He distant future Han those born in the immediate future, there is little reason to be concerned about the rate at which population
16 POPUl~lON GROWN AND ECONOMIC DEVELOPMENT growth is depleting the stock of exhaustible resources. An objection to this argument is that by slowing population growth, societies can "buy time', and prepare for a particular stage of resource depletion. Presumably, technological development might occur that would relieve pressure on He resource by providing substitutes or by enhancing its productivity. This possibility cannot be completely discounted, but it assumes that the technological development will occur in a manner exogenous to the supply and demand circumstances in the market for the resource. Many analysts find evidence that inventive effort of this kind is spurred primarily by expected profitability (e.g., Gol31d, 1972:Chapter 5), but serendipitous technological changes surely do occur that are essentially knowledge driven rather than market driven. For any particular country, in fact, most of the change in resource use will be exogenous to its own market and, hence, population size. A country thus may have an incentive to reduce its grown rate so Hat more people will live under the superior technological (but depleted resources) environment of the future. Such considerations involve comparisons of rates of technological change and resource depletion, as well as complex international relations in resource use, including the effects of one nation's behavior on the well-being of other nations. Since all economically important exhaustible resources are traded in international markets, one can have a clearer view with a global approach. Here, it seems likely that He principal route for technological advance in resource use is for increased scarcity, as signaled by increasing market prices, to stimulate a search for . . . economlzlng strategies. CONCLUSIONS The scarcity of exhaustible resources is at most a minor constraint on economic growth in the near to intermediate term. Although the transition away from conventional petroleum poses some short-term adjustment problems, supplies of alternative fuels and nonfuel resources are adequate regardless of population growth. As any particular resource becomes physically scarce, its concomitant price rise stimulates conservation, improvements in extraction technology, and the search for less expensive substitutes. These adaptations serve to greatly mute, and perhaps entirely counteract, any negative effect of resource depletion on the standard of living. In theory, the price mechanism provides an effective means of coping win the allocation of scarce resources so long as the structure of markets is, technically speaking, complete: that is, there are enough markets to trade resources-exhaustible and renewable~ver the indefinite future and to share risks. However, a complete set of markets does not exist, even in developed countries, and in developing countries, as we discussed above, the markets
E:XHAUSTIB~ RESOURCES 17 that do function have many distortions, impairing their ability to allocate resources optimally over time. Consequen~dy, population growth may be more directly linked to inefficient resource use in reality than in theory, although population policies appear to be a very crude instrument for dealing with inefficient markets. But since it is neither simple nor costless to remove distortions or to create markets where none exist, the prescription of letting markets function efficiently without worrying about resource exhaustion must be qualified. Ihus it is not clear that the effective price of resources will rise over time or that slower population grown will delay the date at which an ascending price level reaches any given point. Even if slower population growth did defer the date of any given stage of resource depletion, it does not follow that it would increase the number of people who had enjoyed low resource prices. It is more likely Hat slower population growth would simply stretch a more-or-less fixed queue of resource users more thinly over time. While this could, in principle, provide more time for serendipitous technological advances in resource extraction or substitution, we do not find this an important factor relative to price-driven technological change. On balance, then, we find that concern about the impact of rapid population growth on resource exhaustion has often been exaggerated, and, in any case, that the effect of changes in population grown in developing countries on global resource use has been and will probably continue to be quite weak.