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The contribution of non-renewable natural resources to economic development : the case of copper in Zambia

University of British Columbia

This thesis focuses on three aspects of long-run planning for mineral-dependent economies: (i) modelling mineral depletion for optimal capital accumulation; (ii) specification and estimation of a mining cost function and a non-mining production function; and (iii) measurement of capital and natural resource stocks. Zambia, a country totally dependent on copper, is used as a case study. The planning model integrates the Ramsey capital model with the Hotelling-Scott exhaustible resource model, utilizing recent advances in dynamic optimization and duality theory. The optimal rate of resource extraction requires that marginal variable cost plus user cost be equal to the world price of the mineral. The user cost of the resource grows at the rate of interest plus the rate of population growth minus the effect of depletion on extraction cost. The optimal allocation of resource revenues equates the marginal benefits from alternative uses: (i) current consumption to raise the standard of living of a growing population; (ii) mining investment to maintain production in the face of deteriorating resource quality; and (iii) non-mining investment to create an industrial base as an alternative to the depleting resource. A variable cost function (VCF) for the mining industry is derived from the assumption that the mining firm minimizes the variable cost of producing a given output. The parameters of a translog VCF for Zambian copper mining are estimated and found to be consistent with the underlying theory. It is also found that domestic labour is only imperfectly substitutable for imported machinery and that labour demand is not very responsive to changing wages. A substantial portion of the empirical contribution is the construction of comprehensive data series for Zambia using the perpetual inventory approach to capital stocks, Divisia, Indexes, and the neoclassical theory of rental prices. Production figures for individual mines are used to construct aggregate cumulative series to which a curve of diminishing increments is fitted to obtain andestimate of the Zambian copper resource.

Text

2010-03-01

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http://hdl.handle.net/2429/21257

Economics

University of British Columbia

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