Discovery of natural resources: A class of general equilibrium models*

- A class of general equilibrium model is discussed for discovery of natural resources.
- Models of closed and small open economies are considered.
- The importance of disentangling price and quantity effects is analyzed.
- Strength of vertical integration and resources dependency determines the limits to accommodate blessing or curse type of theories.
- For exogenous price changes, the share of income earned by scarcity rent and of manufacturing goods imported are important.

When is the discovery of natural resources a curse for a country's industrialization and when is it a blessing? A large literature on economic development has collected evidence on both directions. This paper discusses a class of general equilibrium models that deals with natural resource discoveries and evaluates its potential to accommodate both successful and unsuccessful resource-based industrialization experiences, under different model settings. Particularly, it analyzes the importance of disentangling price and quantity effects. It illustrates that in closed model economies (or large open economies), with vertical integration between manufacturing and energy sectors, the long-run effect on the production of manufacturing goods will depend mainly on the equilibrium price of the natural resource good. Moreover, the strength of the vertical integration, even for small open economies, determines the limits to accommodate blessing or curse type of theories.