Non-Renewable Resources and Sustainable Resource Extraction: An Empirical Test of the Hotelling Rule’s Significance to Gold Extraction in South Africa

Abstract

The study sought to test the applicability of Hotelling’s rule to gold extraction in South Africa. In environmental economics, Hotelling’s rule has come to be a pillar of the exhaustible resources framework and in addition to this, it has presented essential insights into the consumption and extraction of non-renewable resources. According to Hotelling’s Rule, the extraction path in competitive market economies will, under certain circumstances, be socially optimal. An extraction path that is not socially optimal compromises the welfare of future generations. The welfare of South Africa’s present population, particularly in the future, will be greatly determined by the stock of natural resources available. Currently, the production processes deplete natural resources in a way that is not sustainable. For instance, South Africa’s gold reserves are becoming depleted at a rate that, within 25 to 33 years, will mean the end of the industry on which South Africa’s economy has been built. This raises questions regarding how much of these non-renewable resources (gold) should be extracted today, and how much should be saved for future use or for future generations. Is gold being depleted more rapidly than the optimisation level suggested by Hotelling’s Rule? In order to empirically test Hotelling’s Rule, the study was guided by previous literature that had sought to test it, namely, the previously used graphical analysis and autoregressive distributed lag (ARDL) approach to assess the applicability of Hotelling’s Rule. The results showed that there seems to be no significant relationship between interest rates and gold processes. This shows that Hotelling’s Rule does not hold in South Africa. The results of the study suggested that the gold extraction in South Africa is not following a social optimal path. The study recommended that the government come up with measures that prolong the lifespan of the gold reserves. These included research and development to promote technological innovations in the mining sector.