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Tuesday, 15 July 2008

Debunking the "resource curse"

A new paper debunks claims made in several academic papers, that having large resource endowments (e.g. copper or oil) can negatively impact long-term economic growth of countries. It appears previous results have been down to misinterpretation of available data. Excerpt:

Contrary to the claims of the literature on the curse of natural resources, we believe there is little or no evidence that the large endowments of oil or minerals slow down long term economic growth. In fact, the data available so far suggest that natural resources enhance long term growth. We have demonstrated this result by focusing on the levels of per capita GDP rather than on the rates of growth over any given period of time. Our reasoning is simple. If Country A has a higher per capita GDP than Country B, Country A must have experienced faster growth over the long term than Country B.

In addition, we have shown that the negative effect of large endowments of “point-source” resources on institutions claimed in the literature is mostly due to the use of initial GDP values as control variables. Large natural resource endowments appear to increase per capita GDP without a simultaneous mprovement of the country’s institutions. Because of this and because institutions in countries with few natural resources are positively correlated with GDP, the use of GDP as a control in a regression of the quality of institutions on oil or mineral wealth biases the results towards a negative effect of natural resources on institutions. According to their GDP, natural resource rich countries should have good institutions. Because their institutions are poor relative to industrialized countries with similar GDP levels (i.e., they are at the level where they would have been if the country had no oil) the regression assigns a negative coefficient to the measure of oil wealth. In this situation, however, it is wrong to say that oil wealth has caused a deterioration of institutions. It simply has not improved them.

The fact that growth based on oil wealth does not improve institutions may and probably should be viewed as a drawback of resource-based growth. In this sense one may perhaps speak of the curse of natural resources. In an indirect way, however, this result supports the view that the main causality goes from institutions to growth rather than the other way around (see Acemoglu et al., 2001, and Rodrik et al., 2004).


  1. Oh those economists again! I know the resource curse argument - especially a la Ross - and I always thought it was a tidy way of explaining away so many different things that a more careful, much closer-to-the-ground study would help understand. One major problem I have with it is that it always leaves one with the feeling that resource-rich countries are simply confined to the pit of bad institutions. I have not read this article carefully enough - and I probably won't - but from the quick look I have had it does not seem to depart much from that. Now that we know - if we take the researchers' statistical gymnastics for it - "that oil and minerals are largely neutral with respect to the quality of the countries’ institutions" where do we go?

  2. ... to get the follow-up comments. :)

  3. The implication is that having natural ressources doesn't improve institutions. But does it prevent improvements ?


    Let me go read on Botswana again.

  4. I think it is difficult to answer whether it prevents reform of better institutions because we know that emergence of "good institutions" is a complicated process. We are talking about not just having good "economic institutions" but also "political institutions" that reinforces the stability of "economic institutions".

    Certainly if you accept the acemoglu et al findings, then we would have to regard this as an income shock whose impact on institutional reform is unpredictable.

    What matters is the initial set of institutions and the extent to which they would allow greater redistribution of resources which in turn would enable enough accumulation of de-facto power to help change "de-jure" in the long term...leading to better institutions..


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