A Dynamic CGE Analysis of Exhaustible Resources: The Case of an Oil Exporting Developing Country

An extensive literature concerned with optimal depletion of an exhaustible resource, with only a few exceptions, ignores the economy-wide and sectoral distribution effects of resource depletion. This paper presents a dynamic computable general equilibrium model to link the underlying natural resource base to economic performance. The model consists of an intra-temporal price endogenous model of a market economy, embedded in an inter-temporal optimal growth and development model. It is an optimization model that determines the optimal development path of the economy, hence, the inter-temporal depletion problem subject to workings of a multi-sector market economy. This general equilibrium approach captures the economy-wide and sectoral distribution effects of resource depletion. The model, benchmarked to Iranian data, is used to examine the issues related to optimal extraction of an exhaustible resource, optimal savings in the economy, and the allocation of investment funds. ∗ The author wishes to acknowledge the generous help and valuable comments of Shantayanan Devarajan on an early version of the model. Thanks also go to Randall W. Jackson and Walter Schwarm for insighthful comments but all omissions and errors are author’s only.