Endogenous Growth, Asymmetric Trade and Resource Taxation

Since 1980, the aggregate income of oil-exporting countries relative to that of oil-poor countries has been remarkably constant despite structural gaps in productivity growth rates. This stylized fact is analyzed in a two-country model where resource-poor (Home) and resource-rich (Foreign) economies display productivity differences but stable income shares due to terms-of-trade dynamics. We show that Home's income share is positively related to the national tax on domestic resource use, a prediction confirmed by dynamic panel estimations for sixteen oil-poor economies. National governments have incentives to deviate from both efficient and laissez-faire allocations. In Home, increasing the oil tax improves welfare through a rent-transfer mechanism. In Foreign, subsidies (taxes) on domestic oil use improve welfare if R&D productivity is lower (higher) than in Home