Abstract

This paper examines the complex relationship between natural capital and long-term economic growth. Specifically, we review resource-based growth theories and various modeling approaches. In most frameworks, natural capital is considered an additional production factor that supplements traditional inputs. However, we highlight a common conceptual confusion between economic wealth (a stock) and economic growth (a flow). 

This distinction is often overlooked in discussions about the role of natural assets in development. Using World Bank data from 1995 to 2020, we empirically estimate a Cobb-Douglas production function that incorporates produced (physical) capital, labor (human capital), renewable resources, and non-renewable resources. We then classify countries according to their resource endowment and assess the elasticity of natural capital with respect to GDP. To address uncertainty and downside risk, we propose a stress-testing framework that integrates historical worst-case analysis, parametric methods, and extreme value theory. Our results reveal significant heterogeneity in the impact of natural capital on growth.

Over the past 25 years, non-renewable resources appear to have had little influence on economic growth. Conversely, growth has been more responsive to renewable resources. Notably, countries such as Iran, Australia, South Korea, and Nicaragua experienced a negative contribution of natural capital to growth, while Vietnam, Indonesia, Mozambique, and Egypt experienced a positive contribution. 

The stress-testing analysis further underscores wide cross-country variation. Over a 25-year horizon, the countries that are potentially most affected by adverse natural capital scenarios include Ethiopia, Chile, New Zealand, Brazil, Iran, and Poland. An additional insight comes from decomposing the stress test results into the sum of the worst-performing years. This reveals that, in some countries, stress outcomes are driven by one or two severe events. In contrast, in other countries, a prolonged decline in natural capital leads to multiple moderately bad years without any single catastrophic event.

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