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OCR for page 11
| 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
OCR for page 12
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
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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
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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
OCR for page 15
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
OCR for page 16
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
OCR for page 17
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.
Representative terms from entire chapter:
population growth
