Resource Discoveries, Learning, and National Income Accounting

Questions about the ultimate size of
mineral and energy resource endowments and the degree of
fiscal prudence which should be exercised by countries
engaged in resource extraction have become central for many
developing countries during the recent resource boom. To
explore these questions, this paper develops a model of
optimal resource extraction and discovery that combines two
polar assumptions: (i) that discovering a resource today
drives up the cost of future resource discoveries, and (ii)
that extracting resources yields knowledge that reduces the
cost of discovery. Although the model shows that resource
discoveries should be valued at marginal discovery cost in
measures of national saving and income, the ultimate size of
the resource that can be exploited is the result of the
interplay between rising discovery costs and accumulating
knowledge. Empirical tests of the model show that the
resulting income estimates would be extremely volatile for
many extractive economies, owing to the lumpiness of
resource discoveries. Two alternative accounting approaches,
based on Hicksian concepts, yield more intuitive and less
volatile income estimates. The question of fiscal prudence
for extractive economies hinges on how optimistic countries
are about the risks in future mineral and energy markets,
and how far into the future these countries are willing to
project optimistic trends when making decisions about how
much to consume and how much to save of current resource revenues.