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This paper extends the World Bank's Long-Term Growth Model (LTGM) with the addition of a natural resource sector to analyze how long-run growth evolves in resource-rich countries and the growth impacts of price shocks and resource discoveries. In the LTGM-Natural Resource Extension (LTGM-NR), commodity price shocks affect long-term economic growth through physical investment rates. As a large share of resource income typically accrues to the government, the size of the boost to investment in a price boom depends on the government’s fiscal rule. Fiscal rules that prioritize public investment, like a Hartwick Rule, generally lead to the largest increases in long-term growth. However, structural surplus rules, which save commodity revenues, can also boost growth if they free up savings for private investment. The response of growth to discoveries of natural resources is similar to the response to price shocks, although discoveries also produce a direct effect on real GDP, in addition to an indirect effect through investment. The LTGM¬-NR also captures the effect of other (non-resource) growth fundamentals in resource-rich economies, and it is better suited to general growth analysis in these countries than the standard LTGM. However, the LTGM-NR is a supply-side model, and so does not capture the short-run effects of price and discovery shocks that operate through aggregate demand.

The Long-Term Growth Model (LTGM) and its extensions are a suite of models and spreadsheet-based toolkits for analyzing future growth paths in developing countries, based on the Solow-Swan growth model. This volume, The Long-Term Growth Model: Fundamentals, Extensions, and Applications, is a collection of ten chapters that summarize the development of the LTGM over the last decade, and how it has been applied in practice. The volume starts with a description of the Standard LTGM, the simplest and easiest-to-use component of the LTGM suite. It then outlines several extensions to the basic model in important areas such as the implications of growth for poverty (built into the Standard LTGM), the effects of public capital, the determinants of total factor productivity (TFP) growth, and how growth drivers differ in natural resource rich economies. The final part of the book covers six case studies which apply the LTGM in a diverse range of countries: Malaysia, South Korea, Bangladesh, Syria, Egypt, and Sri Lanka. Although growth performances, constraints, and opportunities vary across country contexts, the LTGM framework outlined in this volume, analyzing future growth in terms of TFP, human capital, physical capital, and labor, is universally relevant. The chapters in the volume typically find that popular investment-led growth strategies are unsustainable in the long-run (including those growth strategies relying solely on high rates of public investment). This is mostly due to a declining marginal productivity of capital, though financing high investment rates without high savings rates is also a practical concern. Instead, they find that the most important driver of sustainable rapid long-run growth is productivity (TFP) growth.

Is there a trade-off between raising growth and reducing inequality and poverty? This paper reviews the theoretical and empirical literature on the complex links between growth, inequality, and poverty, with causation going in both directions. The evidence suggests that growth can be effective in reducing poverty, but its impact on inequality is ambiguous and depends on the underlying sources of growth. The impact of poverty and inequality on growth is likewise ambiguous, as several channels mediate the relationship. But most plausible mechanisms suggest that poverty and inequality reduce growth, at least in the long run. Policies play a role in shaping these relationships and those designed to improve equality of opportunity can simultaneously improve inclusiveness and growth.