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Hodjat Ghadimi

“Sustainable Economic Development

Planning in Energy Rich Regions,”
Volume 41, Number 1

Copyright 2016

Hodjat Ghadimi*


E nergy rich regions (ERRs) produce the world’s energy and collectively play
a crucial role in the world economy. The approach to and the outcome of
sustainable regional development in these regions impacts national economies and
redefines the energy and environmental landscapes throughout the world. More
efficient and transportable energy sources developed by these regions since the
mid-19th century have had a marked effect on the state of global energy, envi-
ronment, and economics. With the adoption of fracking and horizontal-drilling

*Hodjat Ghadimi, Associate Professor in the School of Design and Community Development
at the Davis College of West Virginia University, is also a Faculty Research Associate in the
Regional Research Institute. He received both a master’s and a Ph.D. in city and regional planning
focusing on international development planning from the Ohio State University; he earned
a bachelor’s degree in architecture from Lawrence Technological University. The author’s fields
of interests are in development planning, energy-built environment-economy interaction model-
ing, economic development in energy rich regions, and creativity and innovation in urban and
regional economies. His current areas of research are development patterns of energy rich regions
globally, the transition of exhaustible resource-based economies to a diversified and creative
economy, regional wealth estimation, and ecological community design. Dr. Ghadimi has held
teaching positions at Shahid Beheshti University (Iran) and the University of Tehran as well as the
Ohio State University.
The author would like to acknowledge the National Science Foundation (award number CBET-
1235684) for providing financial support for part of this research. Additionally, Dr. Ghadimi extends
his gratitude to Randall Jackson, Director of the Regional Research Institute, for supporting the
research project on energy rich regions and his insightful comments.

The Journal of Energy and Development, Vol. 41, Nos. 1 and 2

Copyright Ó 2016 by the International Research Center for Energy and Economic Development
(ICEED). All rights reserved.

technologies and tapping vast shale oil and gas resources, new ERRs have
emerged that are reshaping the energy scene and future global development.
A bottom-up regional approach to the development of energy rich economies
and the valuable insights that regional models and comparative regional studies
can provide have not received the attention they deserve in the field of develop-
ment economics. With few exceptions, current energy-based economic develop-
ment literature focuses on developing economies at the national level and provides
scarce analyses of the economies on a regional level or with a regional and spatial
perspective. Nevertheless, the dominating question for both national and regional
levels remains: is endowment of a natural wealth a blessing or a curse? Shining
examples of wealth and prosperity include Norway’s handling of North Sea re-
sources, the newly gained windfall wealth of Qatar from the South Pars gas field,
the relatively robust economy of Alberta in Canada, and outlooks of burgeoning
regions in the United States—such as North Dakota, Montana, and parts of
Appalachia, as the Bakken and Marcellus shale plays are produced. Yet the
overwhelming volume of literature clearly indicates that the abundance of natural
wealth in energy rich economies has not translated into the anticipated economic
“blessing” nor sustained development as expected.1
Regardless of economic performance, however, financial capital will continue
to flow to energy rich economies, particularly those with abundant oil and gas, and
will continue to do so in the foreseeable future as the world transitions from its
dependence on exhaustible resources to renewables. In fact, the International
Energy Agency (IEA) estimates show a need for trillions of dollars for new in-
frastructure over the next decades to ensure that sufficient energy is available to
satisfy anticipated worldwide demand. These investments will go to regions
endowed with energy resources, but many questions remain. Which resource rich
regions will attract these investments? How will these investments and the de-
pletion of natural capital change the structure of the regional economy and the
composition of its physical and human capital? How does the interplay of these
capital forms affect regional wealth? What theoretical frameworks should be
employed to analyze sustainability in these regions? Are natural resources detri-
mental to economic development and why? Is there a specific development pattern
in energy rich regions? Are there lessons that could be learned from cases of
success or failures to convert natural resources into long-term regionwide
household wealth? What can newly developed resource regions learn from the
experience of those that have already received or generated trillions of dollars over
the past 150 year history of the commercial energy industry? Can ERRs in the
developing world learn from the experience of those in developed countries? For
example, can we apply what we learn from the experience of Texas, Alaska,
Calgary, and the North Sea to ERRs around the Caspian Sea or in Africa?
We will address some of these questions in the subsequent sections. We pro-
vide an overview of the main characteristics and development challenges of

energy rich regions and briefly review the literature on reasons for the resource
curse and why many ERRs have not transitioned to a sustained and prosperous
economy. Following this, there is a presentation of a general framework based on
constancy of total capital stock for sustainable development in energy rich regions
and illustrates what sustainable development means to ERRs in the context of the
three forms of capital, i.e., natural, physical, and human. After this, the paper
highlights the advantages of a regional approach to development issues of these
economies and proposes a general pattern of development and stages of growth for
ERRs. We briefly report on a knowledge base of ERRs throughout the world and
look at possible ways this knowledge base can serve as a basic data infrastructure
for further analysis of sustainability issues in these regions within a global context.
We conclude with thoughts for future direction of this research.

Development Challenges of Energy Rich Regions

Energy rich regions are endowed with substantial reserves of exhaustible en-
ergy resources; in this paper we focus on ERRs’ oil and gas, including their on-
shore sources and their offshore reserves. The exploitation of energy resources has
played an important role in the development of ERRs, and many of these regions
depend primarily on the extraction of exhaustible resources for their economic
well-being. ERRs are very diverse and are located in clusters across the globe;
geographically they spread from the Arctic to the tropics and from extremely cold
areas of Siberia and Alaska to the hot deserts of Saudi Arabia. They fall under
a wide spectrum of economic systems from planned to market economies, while
the size of their reserves varies as does their level of dependence on resource
There are two features that distinguish ERRs from other regions. First, no other
commodity has the importance that these energy resources have in the global
economy. The strategic and heavy dependence of the world on petroleum has
created a market advantage that exporters of no other commodity enjoy. Of course,
the development of a cheaper and more efficient renewable source of energy could
quickly replace oil and gas as the world’s foremost sources of energy, as oil did to
coal in the past. Second, and more importantly, oil and gas are exhaustible re-
sources, i.e., these regions cannot consider resource revenues as a permanent
stream of income. Therefore, even though there is great variation among these
regions, they all enjoy a finite resource with a strong world market demand and
share the common problem of converting their natural capital into reproducible
capital to sustain economic and environmental development.
The principal development objective of energy rich economies includes rapid
economic growth, diversification of the economy and expansion of non-resource
sectors, and sustaining development to realize intergenerational equity. To move

away from dependence on a transient source of revenue, these economies strive to

convert their valuable, but depletable, natural capital into reproducible physical
and human capital to ensure a stream of permanent income over time concurrent to
preserving the value of their total wealth. A simple portrayal of the schematic
relation between the three capital forms that comprise total wealth are shown in
figure 1 and a theoretical framework is presented in the paper’s third section.
It is common sense that large resource revenues would bring wealth and
prosperity, yet evidence suggests otherwise. Assessment of the economic per-
formance of energy rich economies, many at the national level and a few at the
regional level, indicate that these economies often have not been very successful in
achieving their stated development goals and objectives. A large body of empirical
work on the resource curse phenomenon establishes a negative relationship
between resource abundance and poor economic performance.2 Although it is
generally well established in the literature that natural resource abundance is
negatively related to economic performance, there is no consensus on the reasons
why this relationship exists. The substantial and growing body of literature on why
economies might suffer a resource curse is very diverse, pointing to a wide range
of economic, political, and socio-cultural reasons.

Figure 1

A significant part of the resource curse literature deals with the relationship
between political corruption and economic performance in ERRs and suggests that
resource rents can promote corruption, depending on the quality of the institutions
involved.3 Investigating whether corruption and bureaucratic characteristics affect
growth performance of Middle Eastern and North African countries (MENA),
I. Guetat finds strong direct and indirect effects in the MENA region compared to
other regions and contends that better performing institutions improve the MENA
region’s economic growth.4 He suggests this can be achieved by increasing the
volume and efficiency of investment and by promoting human capital. A. Ades
and R. Di Tella shift the attention from the consequences of corruption to the
causes of corruption and show that rents foster corruption, regardless of whether
the rent is from resource extraction or induced by the lack of product market
competition.5 Their empirical cross-country study finds that countries that have
firms with higher rents also tend to have higher corruption levels. The result of this
study suggests that policies for making markets more competitive could help
control corruption. R. Auty asserts that most resource-abundant countries en-
gender a political state that is “factional or predatory” and distorts the economy in
the pursuit of rents.6 He adds,

…a staple trap model describes the development trajectory and predicts a growth collapse
from which recovery is protracted because in addition to a legacy of obsolete productive
capital all forms of capital tend to run down during a growth collapse, including human and
social capital as well as physical infrastructure… this helps to explain the slow response to
economic reform.

N. Birdsall and A. Subramanian argue that the most important explanation for
the resource curse is that it impedes the development of economic and political
institutions.8 They point out that mineral wealth, such as concentrated oil wealth,
encourages patronage and corruption, forestalls political change, and can be
detrimental to growth and democracy as they try to

…hinder the development of institutions and values critical to open, market-based economies
and political freedom: civil liberties, the rule of law, protection of property rights, and po-
litical participation.

What has become known as “Dutch disease” is another body of literature

explaining the negative relationship between a natural resource boom and eco-
nomic performance. The idea behind Dutch disease is that the windfall revenues
generated by natural resources induces appreciation of the real exchange rate and
leads to contraction of the traded sector.10
T. Gylfason categorizes transmission from natural resources to poor economic
performances in four main channels: Dutch disease, rent-seeking and institutional
quality, education and human capital, and eviction of physical capital.11 From

a different perspective, in his survey of resource curse literature, P. Stevens

identifies six “transmission mechanisms” for why economies may suffer a re-
source curse.12 These include a long-term decline in terms of trade, revenue vol-
atility, Dutch disease, crowding-out effects, increasing the role of the state, and,
finally, the socio-cultural and political impacts. He concludes that “…there is no
simple single explanation of what creates a ‘blessing’ rather than a ‘curse.’ Nor is
there any agreement on any collection of explanations.”13 He suggests a case-by-
case approach rather than a generalized explanation.
This brief overview of the literature on the causes of resource curse emphasizes
the complexity and the multifaceted nature of development in ERRs. Although
there are few studies of resource curse at the regional level, and of that category
the majority of research covers advanced economies, the striking point is the
neglect of the regional impact of this phenomenon at the sub-national level.
Clearly, the sizeable effects of resource exploration and production is on the
natural and built environment and life of local inhabitants of regions that contain
the resources while, on the other hand, the benefits, particularly in the developing
world, flow to the central government. Development planning in ERRs also is
conducted by the central government, often with a predominantly sectoral rather
than a regional approach. In recent years, international donor agencies, non-
governmental organizations (NGOs), and more socially responsible oil and mining
companies have paid closer attention to the regional dimension of energy mega-
projects to mitigate their negative environmental and socio-political impacts. A
substantial part of the existing literature is on a national level with a macro-
economic orientation; however, a regional approach with an emphasis on the
political economy and governance within a global context may shed new light on
causes and cures of the resource curse.

Sustainable Development in ERRs

Achieving an equitable balance between present and future generations is

central to sustainability. R. Solow has conducted pioneering work in this area that
formally analyzes intergenerational equity issues of exhaustible resources.14
J. Hartwick states that to ensure intergenerational fairness, i.e., constant flow of
consumption over time, it is necessary to invest the entire economic rent from an
exhaustible resource in reproducible capital.15 In other words, investment in
physical capital and other forms of reproducible capital must equal the economic
depreciation of the resource. R. Solow shows that Hartwick’s rule can be inter-
preted as one of holding a total stock of capital constant over time as a condition
for intergenerational equity in the case of exhaustible resources.16 While these
studies were for a closed economy, J. Vincent et al. extend the analysis to a small
open economy and account for capital gains arising from changes in the prices of

extracted resources.17 More recently, K. Hamilton and J. Hartwick build on pre-

vious works and link investing exhaustible resource rents into growth in a model
of optimal savings.18 In essence, this literature suggests that an energy rich
economy should at least maintain a non-decreasing stock of total capital and be
able to diversify its capital base to compensate for depletion of its oil and gas
Recent World Bank studies have suggested a broad framework for valuation of
natural, physical, and human capital, thus providing a better understanding of
sustainable—or unsustainable—development in an economy.19 With these efforts,
sustainable development has become more comprehensive and measurable. The
World Bank study defines sustainable development as “a process of managing
a portfolio of assets to preserve and enhance the opportunities people face.”20 The
assets in this definition include physical capital, also called produced capital,
natural capital, and intangible capital, which broadly includes human capital and
the quality of formal and informal institutions.21 The condition, therefore, for
sustainable development is that all these assets grow over time—or at least do not
decrease. This is similar to the concept of constancy of total capital stock, above,
more comprehensively offering a new statistical indicator “genuine saving rate” or
“genuine investment rate” as the main indicator for sustainable (or unsustainable)
development. The genuine saving (investment) rate improves standard measures
of wealth accumulation by adjusting the traditional saving rate downward by an
estimate of natural resource depletion and pollution damages, and upward by
growth in the value of human capital. This rate “has become a central focus in the
measurement of the sustainability of an economy.”22 As a precursor to a “genuine
saving rate,” an early theoretical framework for properly calculating national
product for an exhaustible resource based economy was formulated using the
concept of net national production (NNP).23 This index properly accounts for
investment activities in a dynamic economy and, most commonly, it is inter-
preted as the largest “permanently maintainable amount of consumption.”
H. Askari et al. offers what may be called as “true” or comparable to the standard
measure of NNP calculations for the oil rich Gulf Cooperation Council (GCC)
member countries (Saudi Arabia, United Arab Emirates, Kuwait, Bahrain, Qatar,
and Oman).24
Constancy of total capital stock and the World Bank notion of development as
a “process of portfolio management” provides a broad framework to study the
economic development in an ERR where its most valuable assets are exhaustible
natural resources. Sustainable development in an ERR is crucially dependent
upon managing its finite resources and its ability to transform its natural capital
into reproducible physical and human capital—in the broad sense of intangible
capital. Tracking the interplay of these three forms of capital over time and
finding their optimal size provides important insights into the nature of devel-
opment in ERRs.

A General Development Pattern in ERRs

For too long, a bottom-up regional approach to relevant global problems, in

general, and to development issues, in particular, has been neglected. The value of
region-based models and multiregional studies and the insights they can provide in
understanding complexities of a higher level national and global economy are
largely ignored in the field of development economics. There are signs this may be
changing. There is a surge of research interest in analyzing spatial aspects of
development and underdevelopment. This is evidenced in the increasing popu-
larity of emerging fields such as the “new economic geography”25 and “spatial
econometrics.”26 For example, the 2009 World Development Report, the in-
fluential annual World Bank publication, focused on spatial disparities and
development policies.27 The report underscores the significance of economic ge-
ography and documents how this is changing through three dimensions of

…the increase in density of economic activity, the decline of distance between economic
agents and markets, and the persistence of division between and within countries due to
natural, cultural and policy-related barriers.

A growing interest in spatial analysis is also evident in the wide and varied
applications of geographic information systems, remote sensing, and spatial
knowledge systems in analyzing urban and regional development processes. Some
business and management visionaries have argued that “region states” have replaced
nation states as the organizing economic units of the global economy. K. Ohmae29 and
others consider the mega-regions to be new economic units.30 Still other economists
and political scientists see the rise of regional blocs such as European Union (EU), the
Association of South East Asian Nations (ASEAN), and the North American Free
Trade Agreement (NAFTA) as a sign of the rise of regionalism.
Analyzing sustainability of development in energy-based economies at a re-
gional level may provide insights that are not otherwise possible. National-level
studies and models are mostly sectoral and ignore interesting development issues
arising from spatial organization of production, distribution of physical and human
capital over space, and spatial factors affecting the diversification of the capital
base. These studies mostly focus on developing economies while a regional ap-
proach can cut across all energy rich economies in both the developing and de-
veloped world. A regional perspective can open doors to contributions from
multidisciplinary spatial scientists from a wide range of fields including geogra-
phy, planning, regional science, and regional economics. Finally, using sub-
national regions as units of analysis can facilitate and improve national-level
development planning by providing a richer picture of development—illuminating
important issues that may be lost at the national level—and can shed light on
important global sustainable development concerns.

Development economists have long searched for patterns that relate successful
development31 to structure and policy at the national level, and numerous studies
have drawn stylized facts and patterns of development at the national level. These
patterns are helpful in policy making for a particular group of countries or to put
development issues of a single country in a broader context.32 But no such work
has been undertaken at a regional level. In a similar vein, we suggest using regions
as units of analysis to derive “patterns of development” and appropriate “devel-
opment metrics” in a multiregional approach to sustainable development in ERRs.
The national-level studies have focused primarily on a detailed economic structure
defined by a number of macroeconomic indicators such as sectoral shares of gross
domestic product (GDP), trade intensity, or financial market development. In
a regional approach, one can extend the framework to include important geologic,
geographic, and geopolitical dimensions in addition to economic factors. A re-
gional knowledge base that includes some of these aspects will be introduced in
the next section.
ERRs not only have different geographies, but each region, depending on the
date of resource exploration, falls into a different stage of economic development.
W. Rostow,33 in his well-known theory of growth, identifies a sequence of well-
defined stages that a national economy passes through in its economic develop-
ment process. These stages include traditional society, precondition for take-off,
take-off to sustained growth, drive to maturity, and age of high mass consumption.
J. Parr34 explores Rostow’s stages of economic growth thesis in regional terms
with three distinct perspectives: regional, multiregional, and interregional. Our
focus here is on a regional perspective with no direct reference to a national
economy or other regions within a nation. The stages theory focuses on national
economy and generalizes the sequence that any economy in modern history fol-
lows. But in the case of ERRs, a certain and measurable pattern of resource ex-
ploitation strongly shapes and influences the production level and, thus, the
economic growth of the region. We consider this common path of resource de-
pletion and, similar to Rostow’s theory, impose a five-stage economic-growth
sequence to an energy resource based region (figure 2). In this case, the leading
sector is the energy resource but initially often has very weak forward and
backward linkages with other sectors of the regional economy.
If we look at resource exploitation stages, we find that once a reserve is ex-
plored, a substantial inflow of financial and human capital occurs. Investments in
the form of megaprojects puts in place the required infrastructure—rigs, ma-
chinery, roads, pipelines, communication systems, and, in some cases, a whole
host of supporting residential and non-residential buildings—to start the pro-
duction. This take-off stage is a transitional period from a traditional pre-resource
time where, in addition to an accelerated creation of physical capital, there is
a large inflow of highly skilled labor from outside the region. The investments
continue to flow in until the full maximum production capacity of resource

Figure 2

extraction is realized. After this short duration of take-off, a longer stage of ma-
turity begins until a plateau of resource production is reached. The duration of this
maturity stage depends on the size of the reserves and the level of extraction and
could last for decades. This is the crucial stage where the region pays off returns to
investments made during the take-off stage, maintains and expands resource
production capacity, and, most importantly, has the opportunity to convert its
valuable natural resources into reproducible forms of physical and human capital
to ensure a sustained growth after the resource is gone. After passing a peak, and
some argue that globally we are approaching or have already passed this peak,
resource production declines during a transition period to the post-resource stage.
During this transitional period, the fortunes of the region could continue steadily,
fall precipitously, or even increase depending on the quality of the region’s in-
stitutions, level of diversification, and the degree of success (or the extent of
failure) in converting its exhaustible natural resource into reproducible capital
during the maturity stage. The total accumulated reproducible capital has reached
a threshold level if the economy can sustain its production level after the transition
period and into the post-resource stage. At this stage, with successful diversification
of its export base to non-resource sectors, the region loses its identity as an energy
rich region and with long-term factor mobility becomes fully integrated into na-
tional and global markets.
Figure 3 schematically shows the different stages of stocks of exhaustible
natural capital (N), reproducible physical capital (K), and human capital (H). The
outcome of converting exhaustible into reproducible capitals determines the
economic performance and sustainability of development in an ERR.

Figure 3

Regardless of their performance, the existing ERRs in both advanced

economies or in the developing world can be classified under these growth
stages. In North America, for example, Pennsylvania, Oklahoma, Texas, and
Alaska fall in post-resource, transition, maturity, and take-off stages, re-
spectively. Similarly, in the Middle East most regions, such as Khuzistan in
Iran and Jubail in eastern Saudi Arabia, are in their maturity stage approaching
the second transition stage. Areas such as South Pars and the Caspian Sea are in
the take-off stage and there are numerous smaller regions that have passed their
resource age.

Development of ERRs in a Global Context

Although ERRs have the common problem of converting valuable, but ex-
haustible, natural capital to other forms of reproducible capital, they are very
diverse in size, resource endowments, climate, and differ widely on a host of
socio-economic and political characteristics. Their location with respect to
major consuming regions and, thus, distance and mode of transportation and the
required infrastructure varies widely. ERRs experience different stages of
growth and fall under very diverse political/institutional frameworks. This
diversity clearly shows the multifaceted nature of development in ERRs and the
need to study sustainability issues in these regions within a global context that
goes beyond economic factors to include geographical and socio-political

dimensions to provide an appropriate framework. Such a framework, in addi-

tion to a comprehensive compendium of information on ERRs around the
world, not only helps in launching development programs in a particular region
but can also facilitate a learning process among these regions. M. Storper35
discusses issues of territorial development in the context of a global learning
economy and R. Florida36 maintains that the regions that grew by extracting
natural resources and mass-produced commodities now must harness knowl-
edge and ideas and, in effect, become learning regions to keep an economic
advantage.37 ERRs at early stages of development can learn from the experience
of those that have successfully moved from dependence on exporting a primary
resource to a more diversified economy based on reproducible physical and
human capital.
At the Regional Research Institute, we have used ERRs as a flexible re-
gional scale to construct a comprehensive knowledge base. This knowledge base
combines both spatial and non-spatial data and information related to ERRs
under three main rubrics: geologic, geo-economics, and geopolitics to provide
a clearer picture of wealth in these regions embodied in the three main capital
forms: natural, physical, and human. This regional/spatial knowledge base is
used to derive stylized facts and a pattern of development in ERRs and lays the
foundation for further quantitative and qualitative analyses. The following sec-
tions describe these three sets of indicators and the how they relate to the three
capital forms.

Geologic Indicators—Reserve Size: In his book, GeoDestinies, Petroleum

geologist Walter Youngquist writes,

The destinies of all nations and all people are in many ways bound up with the mineral and
energy mineral resources of the Earth. Events of the geologic past have richly endowed some
nations with valuable Earth resources, whereas others have very few. The result is markedly
different destinies for different nations.

The Earth’s mineral riches are distributed unevenly over the globe and this has
propelled some regions with opportunity to achieve great power and affluence
with the development of their resources. Geologic factors play a crucial role in the
development process of an ERR. The most important factor is the size of a reserve,
which determines the scale of initial investments and the duration of resource age.
The longer the period of resource exploitation, the more enduring the impact is on
the regional economic structure and its development. Often in the case of smaller
reserves, energy boomtowns have turned into ghost towns soon after the resources
have been depleted. In addition to the size of a reserve, other geological factors
such as depth, age, dominant resource type—oil, gas, or condensate—and
chemical qualities generally characterize the nature of a region’s natural capital.
The size of reserves and other geological factors also have direct bearing on the

amount and qualities of physical and human capital needed to exploit the resource
and determine the duration of resource exploitation in the region.
Geo-Economic Indicators: All regions around the world have energy needs
and some supply energy the same as ERRs. The two distinct groups of regions
with crucial significance to global energy dynamics are the major energy-pro-
ducing (net energy exporters) and the dominant energy-consuming regions (net
energy importers). The most common flows between producing and consuming
regions is energy, either in crude or refined form, in one direction and in-
vestments and technology in the other (figure 1). Our focus is on a subset of
energy-producing regions endowed with significant reserves of two exhaustible
resources—oil and gas. The oil and gas reserves often coexist and are concen-
trated in specific regions of the world showing a very different geography than
that of other energy sources as is the case for coal. Distinctively separating
energy-producing and energy-using regions, oil and gas have a volatile trading
system and pose more urgent challenges than coal that is found abundantly in the major
energy-consuming areas of the world. Oil and gas are the dominant global energy
sources; the existing energy transportation and transfer infrastructure, largely shaped by
the requirements of these resources, links ERRs and consuming regions. Distance,
proximity, and spatial layout of energy transportation infrastructure—whether pipelines
or shipping lines—are salient factors that are captured and measured in the geo-
graphical dimension of an ERR knowledge base and analytic framework.
Geopolitical Indicator: Oil and gas have been an important concern in the
world economy and geopolitics of our time. An important indicator showing the
structure of power and the nature of socio-political institutions in ERRs is where
they fall on a bipolar economic spectrum (figure 4). At one end of this scale are
centrally planned economies based on the concept of socialism where resources
are controlled and allocated by the state. This socialist economic structure also is
known as a command economy. The other end of the scale is the free market
economy based on capitalism where the “invisible hand” of the price mechanism
determines resource allocation. There is no purely planned or purely market
economy, rather, there is a gradation of mixed economies each falling within this
wide spectrum based upon its dominant economic structure and its share of public
and private sectors in the economy.
The relative position of an ERR in this spectrum implies distinct variation in
the nature of governance and quality of institutions. The relationship with other
regions, national economy, and the rest of the world, the role and dominance of
international or national oil companies, and whether the energy sector in an ERR
remains as an enclave or is integrated with other sectors of the economy varies
with the position on this spectrum.
Recent World Bank studies show that the share of physical (produced) capital
in total wealth is constant across different country income groups, but the share of

Figure 4

natural capital tends to decline with income while the share of intangible capital
rises. The study also shows much higher genuine savings (investment) rates for
market economies than for centrally planned and other resource-dependent de-
veloping countries. These findings clearly indicate that rich market economies do
better with their physical capital. In other words, these economies are wealthy
because of the skills of their population, the quality of institutions supporting
economic activity, and their ability to transform natural capital into intangible
capital. Therefore, the position of an ERR on the planned-market spectrum has
much to say about the quality of institutions and the role of governance in ex-
ploitation of the resource base and the nature of transforming these transient
revenues into other forms of reproducible capital. In addition, the level of in-
tegration of the energy resource sector into other sectors and into the national
economy is also determined primarily by the position of the ERR on the planned-
market spectrum.
Nowhere is the need for a holistic and systematic approach to development
more important than in ERRs whose fortunes can fluctuate widely depending upon
economic, political, and environmental factors, and that struggle in converting
their valuable but exhaustible natural resource exploitation into long-term im-
provements in physical and human capital. Tracking the interplay of these three
forms of capital over time provides important insights into the nature of devel-
opment and the progress of regional development. This comprehensive knowledge
base of energy rich economies at a regional scale provides a useful information
infrastructure to assess three capital forms in these regions and lays the foundation
for comprehensive studies of sustainable development with a new economic-
spatial perspective. The knowledge base can be used for: classifying these regions
using various schemes and identifying salient features of each sub-group of ERRs;
establishing simple stylized facts based on relationships between spatial and
economic structure and the pattern of development in these economies, and
serving as a basis for qualitative and quantitative studies which in turn can further
enrich the knowledge base.


This paper contributes to the extensive literature on sustainable development in

energy rich economies with an emphasis on the increasing interest in and the value
of a regional approach. The paper introduces economic development challenges in
ERRs as an important group of regions where consequences of their development
have profound implications for their respective national economy and for the world’s
energy, environment, and economy. The paper claims no methodological innovation;
rather, it provides a conceptual modeling framework based on the established theo-
retical literature on sustainable development in resource rich economies. But the
article does offer a novel approach to conceive of the development of ERRs within
a global context and offers a general pattern for, and stages of, growth in ERRs and
describes how the interplay of capital forms may unfold over time. The paper
highlights the multifaceted nature of development in these economies and the need for
a holistic and comprehensive context for proper understanding and analysis of sus-
tainable development issue in ERRs. For this purpose, a unique regional knowledge
base as a broad context for applied quantitative and qualitative development analyses
of energy rich regions is proposed and introduced.
An immediate next step for this research would be to develop an economy-wide
model based on the constancy of wealth or capital stock to analyze energy-
environment-economy interactions in a systematic way. Finding comparable
data for all ERRs around the world has proven to be very difficult, but it would be very
useful, for example, to use data on ERRs in North America or in the United States to
test the validity of stages of growth in ERRs. Determining the duration of the maturity
stage can help authorities and policy makers plan for capital base diversification to
sustain economic development and avoid many symptoms of the resource curse or the
boom-to-bust cycles that afflict many ERRs. Using the knowledge base to conduct case
studies of ERRs with varying positions on the planned-market spectrum experiencing
a different stage of growth or with diverse reserve size could provide invaluable in-
sights into the development processes of these economies. Case studies and compar-
ative analyses can facilitate exchange of experience for ERRs with varying economic
structure, stage of development, and resource life. These qualitative studies can facil-
itate planning and decision making and result in important policy lessons at regional,
national, and global scales. The broader ERR development context suggested in this
paper can be used to derive stylized facts and development patterns in ERRs. Those
regions in earlier stages can learn from the extensive experience of regions that have
passed—successfully or unsuccessfully—their resource dependence period.

Examples include A. Gelb, Oil Windfalls: Blessing or Curse? (Washington, D.C.: A World
Bank Research Publication by Oxford University Press, 1988), and H. Askari, Middle East Oil
Exporters: What Happened to Economic Development? (Northampton, Massachusetts: Edward

Elgar Publishing Inc., 2006), who write about dismal economic performance of oil-producing
economies. The seminal works of J. D. Sachs and A. M. Warner, “Natural Resources and Economic
Development: The Curse of Natural Resources,” European Economic Review, vol. 45, no. 46
(2001), pp. 827–38, and “The Big Push, Natural Resource Booms and Growth,” Journal of De-
velopment Economics, vol. 59, no. 1 (1999), pp. 43–76, describe a resource curse that has led to the
widely held belief in the literature that natural resource abundance tends to slow down economic
For an overview and literature survey of the resource curse, see J. D. Sachs and A. M. Warner,
“Natural Resources and Economic Development: The Curse of Natural Resources;” T. Gylfason,
“Natural Resources, Education, and Economic Development,” European Economic Review, vol. 45,
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Survey,” Journal of Energy Literature, vol. 9, no. 1 (June 2003), pp. 3–41; or F. van der Ploeg,
“Natural Resource: Curse or Blessing?” Journal of Economic Literature, vol. 49, no. 2 (June 2011),
pp. 366–420. Noteworthy national-level studies are J. D. Sachs and A. M. Warner, “Natural Re-
source Abundance and Economic Growth,” NBER working paper no. 5398, Cambridge, Massa-
chusetts, National Bureau of Economic Research (NBER), 1995, and R. M. Auty, “The Political
Economy of Resource-Driven Growth,” European Economic Review, vol. 45, no. 4 (2001), pp.
839–46. More recent studies at the regional level include E. Papyrakis and R. Gerlagh, “Resource
Abundance and Economic Growth in the United States,” European Economic Review, vol. 51, no. 4
(2007), pp. 1011–39, and G. Michaels “The Long Term Consequences of Resource-Based Spe-
cialization,” The Economic Journal, vol. 121, no. 551 (2010), pp. 31–57.
See C. Leite and J. Weidmann, “Does Mother Nature Corrupt? Natural Resources, Corruption,
and Economic Growth,” in Governance, Corruption, and Economic Performance, eds. G. Abed and
S. Gupta (Washington D.C.: International Monetary Fund, 2002), pp. 159–96.; X. Sala-i-Martin and
A. Subramanian, “Addressing the Natural Resource Curse: An Illustration from Nigeria,” NBER
working paper no. 9804, Cambridge, Massachusetts, National Bureau of Economic Research
(NBER), 2003; and J. Isham, L. Pritchett, M. Woolcock, and G. Busby, “The Varieties of Resource
Experience: Natural Resource Export Structures and the Political Economy of Economic Growth,”
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I. Guetat, “The Effects of Corruption on Growth Performance of the MENA Countries,”
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A. Ades and R. Di Tella, “Rents, Competition, and Corruption,” American Economic Review,
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R. M. Auty, op. cit.
Ibid, p. 845.
N. Birdsall and A. Subramanian, “Saving Iraq from Its Oil,” Foreign Affairs, vol. 83, no. 4
(July/August 2004), pp. 77–89.
Ibid, p. 27.
See W. M. Corden, “Boom Sector and Dutch Disease Economics: Survey and Consolidation,”
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Disease: A Disease After All?” Economic Journal, vol. 94, no. 373 (1984), pp. 41–55; and

N. Benjamin, S. Devarajan, and R. Weiner, “The Dutch Disease in a Developing Country: Oil
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T. Gylfason, op. cit.
P. Stevens, op. cit.
Ibid, p. 3.
R. M., Solow, “Intergenerational Equity and Exhaustible Resources,” Review of Economic
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19 st
The World Bank, Where is the Wealth of Nations? Measuring Capital for the 21 Century
(Washington, D.C.: The World Bank, 2006).
Ibid, p. 5.
Some authors who have added social and organizational capital as a separate category have
suggested wealth creation as “the process of using the four types of capital in combination to give
rise to flows of goods and services which people want, in such a way that the capital stocks and the
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K. Hamilton and J. Hartwick, op. cit.
H. Askari, Saudi Arabia’s Economy: Oil and the Search for Economic Development (London:
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K. Ohmae, “The Rise of the Region State,” Foreign Affairs, vol. 72, no. 2 (spring 1993),
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