Non-renewable and renewable resource effects on economic growth

The substitution between renewable and non-renewable energy sources has become one of the central debates of economists over the past decades. These two types of resource are different with respect to the replacement ability. Then, the output's growth based on either energy source is expected to show different paths along the optimal and balanced-growth path. The previous literature studied the optimal extraction of non-renewable resource and its policy implication, optimal resource price, long-run output growth in the presence of non-renewable resource, the transition from non-renewable energy to renewable one, and the importance of substitution between renewable and non-renewable resource for sustainability. The path difference between these two outputs has not been addressed with all possible models. Therefore, one part of this thesis attempted to study and compare the characteristics associated with renewable and non-renewable energy-based outputs along the balanced-growth. The analysis is divided into two cases supposedly occurred in the same country. In the first case, the output is based on non-renewable energy while on renewable energy in the second one. The Hamiltonian function is subtracted from a problem in which the maximization of the utility function is subject to the constraints associated with the change in capital and energy stocks. We first consider optimal control theory and later use the theoretical results for the simulation with MATLAB. The result supports that renewable energy-based output grows at a positive rate along the optimal path whereas that of non-renewable energy depends on whether technological progress and saving are high enough to exceed the share of non-renewable energy in output. Along the balanced growth path, non-renewable energy-based per capita output growth would be negative if there is no technological progress. Without technological progress, that of renewable energy-based per capita output would be however positive if the investment-elasticity of energy production is high enough. Moreover, the system associated with non-renewable energy-based output would have saddle-path stability if the share of non-renewable energy is low enough, whereas that of renewable energy-based output shows stability if the share of renewable energy is sufficiently high. Further results will be discussed in the analysis. Other parts of this thesis deal with the well-known resource curse hypothesis which describes the negative relationship between economic growth and natural resource abundance. In the empirical work, the authors demonstrated this resource curse theory with the significant negative coefficient associated with resource rent ratio to GDP as a proxy for the resource dependence. However, the disagreement has emerged following the good growth performance in some resource-rich countries and the contrasting results in the literature, which are the positive and negative sign of this ratio. Therefore, this part of the thesis addresses this disagreement by theoretically and empirically analysing output growth with natural resource. The theoretical results suggest that resource dependence can be associated with positive and negative economic growth depending on the optimal pattern of resource use. Later, this theoretical result is tested in empirical work including 130 countries and time periods between 2003 and 2014. By dealing with the possible endogeneity issue, we apply the system GMM and find that the resource rent ratio to GDP, as a proxy for the resource dependence, is statistically significant and associated with positive economic growth. This empirical result is consistent with the theoretical analysis and thus, challenges resource curse hypothesis. Natural resource-dependent countries do not necessarily show poor economic growth.