Thank Philippe Aghion for useful comments

 Natural resource abundance  resource curse. Russia and many countries. Empirical findings. Can we escape from this biased production structure? And how? No theoretical modeling provided.  We need to develop non-oil sectors  technological progress.  Possible way to solve this puzzle – directed technical change (DTC)  possibility to manage which sectors to develop.  How to manage - to direct investments from oil sector to high technology sector.

 Economies abundant in natural resources tend to grow slower than economies without this endowment. (Sachs, Warner, 1997, 2001) Easy to get resource rent. Distortions in production structure of the country. – export orientation Slow growth.  Resource abundance – resource curse  bad institutions Good example (Norway)  1) establishment of the institutions 2) discovering of resources Bad example (Soviet Union, Brazil)  1) discovering of the resources 2) unsuccessful attempt to improve the institutions Being at the second case, can we escape resource curse?

 TFP differences matter for cross country income differences and convergence (Hall, Jones, 1999)  Positive empirical correlation between factor endowments (K, h) and productivity (A)  DTC concept allows to manage productivities across sectors. The goal – to make sectors more productive Although, It is not enough to solve the problem of the resource curse. This approach also faces some problems at the stage of impulse to “catching up” process  Sources of productivity differences:  Mismatch between technologies and factor endowment (Acemoglu, Zilibotti, 2001)  Political barriers against technology adoption and inappropriate competition policy (Acemoglu, Aghion, Zilibotti, 2006)

 (Acemoglu, 2002) To distinguish factor biased and factor augmenting technical progress.  Two major forces affecting equilibrium technology bias:  Price effect (encourages innovation directed at scarce factors)  Market size effect (increases productivity of more abundant factors) The force of each effect depends on elasticity of substitution between factors.

Endogenous growth model with directed technological change (Gancia, Zilibotti, 2008)  Closed economy  2 sectors High-skilled (Ah), Low-skilled (AL)  Intermediate production (expending-variety)  Externality – degree of increasing returns in production function of intermediate goods (consistent with the existence of a BGP)  Costs of innovations – new variety requires a fixed cost of μ units of final good.  Endogenous directed technological change – skilled-biased technical progress (BGP)  Innovation vs technology adoption

 (Gancia, Zilibotti, 2008) To explain the causes of productivity differences across countries  Inappropriate technologies  Existence of the barriers to technology adoption  Within-country misallocations across sectors due to policy distortions  To determine optimal competition policy for an increase in economic growth

Relationship between market power and innovation Monopoly rent or competition will stimulates innovations?  Initially – growth rate is maximized by granting monopolists the maximum power. Growth-maximizing policy – optimal policy, provides technological convergence. (When human capital is unimportant or scarce)  Further – The more relevant human capital in production the lower must be monopoly power to achieve maximal growth rate. As human capital accumulates – high monopoly rents can become a barrier to growth.

 Mismatch between technologies and factor endowment in poor countries is a source of productivity differences:  implication of inappropriate technology  low productivity  Political barriers against technology adoption and inappropriate competition policies can contribute to persistent productivity differences:  different market powers across sectors  resource misallocation  distortions in direction of technological change  low productivity We apply this concept to resource abundant economy - extracting sector instead of low skilled, and high technology sector instead of high-skilled to look the optimal ‘technological bias’ and an appropriate industrial policy.

 (Acemoglu, Aghion, Bursztyn, Hemous, 2010) DTC with environmental constraints  Characterization of dynamic tax policies for sustainable growth and maximization of social welfare -Only temporary taxation of ‘dirty’ production -Optimal policy includes ‘carbon tax’ as well as a research subsidy -Quicker the policy reaction – shorter the slow growth transition phase

 Why do we anchor to resource intensive production? i.e. direct investments towards extracting sector We can not develop high technology sector because of low relative productivity (AABH – assumption) (Benhima, 2010) due to imperfections on the financial market. Credit constraint for high technology firms. The main idea is to explain the resource curse phenomenon and to find a way to escape it.

 Solution to the problem of resource curse – DTC, moving investments from extracting sector towards high-technology one  We can consider an aggregate productivity level where investments to these sectors can be substitutable. By increasing H investments we reduce R investments.  By direction of technical progress to H sector we can make it more productive and therefore more profitable. So we can change the production structure of an economy and escape the resource curse. But....  The main problem – to provide an insentive for investment movements. 1) Liquidation of the credit constraint for H firms by providing subsidies for them. 2) Reduction of the profits of R firms by taxation 3) Regulation of monopoly power at the R sector by legislation (Ah=Ar) 4) Bribes for R monopolists

 Introduction of natural resources into endogenous growth model (shumpeterian type)  BGP exists if we reduce in time the amount of natural resources used in production.  Introduction DTC, Two sectors economy

Continuous time, closed economy, 2 sectors.

1)The corner solution is only possible (because the production function at one of two sectors contains exhaustible resources) 2)immediate convergence (because of substitutability of investments taking into account the aggregate level of the innovations)

1)To consider this framework with elements of political economy (Acemoglu, Aghion, Zilibotti, 2006)

 In an economy with natural resources maintaining of both sectors is impossible  We can escape resource curse by changing investment direction  In resource abundant countries holders of resources don’t want to move out of this sector  But we can compute the minimal bribe necessary for development high- tech sector