International borrowing for resource extraction
Date
1975
Authors
Long, Ngo van
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Abstract
This is a theoretical study of some basic aspects of foreign
investment (and foreign borrowing) and natural resource exploitation.
Our emphasis is on optimal planning and regulation but the consequences
of the lack of social interventions are also pointed out.
Whether a community should plan for more or less consumption
for future generations depends not only on its rate of time preference
but also the cost of foreign borrowing. It also is warned that even
for a small country, the Fisher Separation Theorem - separating
production decisions from financing decisions - may not apply when
natural resources have aesthetic values not reflected in market prices.
The problems of efficient allocation of resources over time
and distribution of gains between the home country and foreign
investors received particular attention. Optimal fiscal mixes
(in particular, tax on foreign capital and royalty) are derived under
various assumptions about the behaviour of firms. Conditions under
which the usual static optimal tax on foreign capital must be modified
are identified.
It is shown that foreign investors may react adversely to
the risk of nationalization and that resources may be exhausted too
quickly as a consequence.
There is also another argument for more conservation : the
country may obtain better information as events are observed, causing
a revision of expectations. The irreversibility of resource depletion calls for more caution in this case. The optimal behaviour of a
risk neutral community exhibits properties akin to risk aversion
under these circumstances.
Under uncertainty, the optimal allocation of natural resources
between the domestic and the foreign sectors depends on the community's
attitudes to risk. Not only primary characteristics of the
community's utility function - such as risk aversion or risk
preference - but also secondary properties such as the measures of
relative and absolute risk aversion play important roles in the
determination of the optimal amount of foreign investment in natural
resources.
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