Resource Discoveries and `Excessive' External Borrowing

This paper incorporates a three-sector Dutch disease model into the overlapping generations framework of O. Blanchard (1985). It is shown that, if the extraction of natural resources is capital intensive, then a resource discovery may shift income away from labor. If this happens, then the asset holders at the time of the discovery will incur such a large debt that, in order to pay the interest on the debt, aggregate expenditure in the new steady state would have to be smaller than it was before the resource discovery. The country may then experience both real depreciation and proindustrialization. Copyright 1991 by Royal Economic Society.