Lending terms, debt concessions, and developing countriesʹ resource extraction

We study the relationship between natural resources extraction, borrowing, and debt for a developing country that possesses a natural resource, in a two-period framework, and study how an outside ‘donor’ may affect the rate of extraction of the resource, through different types of policies. With no donor intervention the resource is always fully extracted over the two periods. unconditional debt forgiveness and interest rate subsidies have weak effects on the extraction rate, and may never induce the country to save the resource permanently. Conditional mechanisms have much greater effetts, and may in many cases induce the country to save the resource beyond period 2. Generally interest rate subsidies are more powerful than pure debt forgiveness, by inducing more extraction postponement or permanent saving of the resource per unit of money spent by the donor.