| Abstract |
This paper analyzes development of a small low-income economy that is endowed with an open access renewable natural resource. To carry out the analysis the paper expands the neoclassical growth model to include a renewable resource and a home production sector that specializes in harvest of the resource. There exist two saddle path stable steady states. The interior steady state preserves the natural resource despite its open access nature while the corner steady state depletes the natural resource stock. The initial endowment of natural resource and capital assets determines which steady state the economy converges to. If the economy starts with higher level of assets capital deepening occurs relatively quickly and labor productivity in the formal sector grows rapidly. This results in higher wages, which creates an incentive to pull labor away from the informal harvest and preserve the natural resource. On the contrary, if the economy starts with lower levels of both assets by the time the capital stock accumulates to draw labor into the formal sector the natural resource has already been depleted. In addition, if the intrinsic growth rate of the natural resource is low or if the size of the economy relative to the biomass of the resource is high then the economy always depletes the natural resource stock and regardless of the initial endowment of assets converges to the corner steady state. |