Does natural resource abundance breed corruption? The role of political institutions

Over the last few decades, the effect of natural resources on economic growth has become a long-debated issue. Countries with abundant natural resources grow in different ways. Various studies have examined the resource curse hypothesis and found evidence both for and against this hypothesis. Recent studies are giving importance to whether the resource abundance countries are corrupt. This study explores the association between the perceived level of corruption and natural resource abundance in conjunction with the quality of political institutions. This study examines the threshold effect of the quality of political institutions on corruption in resource-abundant countries. Using a sample of 179 countries from 2002 to 2014, this study preliminary identifies the determinants of corruption. Using OLS, 2SLS and panel system GMM estimation techniques, this study finds that resource abundance countries are always at risk of corruption. The findings also suggest that average growth rates, openness of the country, rule of law, democracy, government expenditure, inequality and ethnicity are the significant determinants of corruption. We examine the effect of the interaction term between resource abundance and the quality of political institutions and find that the effect is negative if the institution’s quality is above the threshold value. In the case of country groups, the effects are not similar for all country groups. Those countries that achieve the threshold value can escape the resource effect of corruption. The government and other donor agencies can help resource-rich developing countries develop the quality of institutions and thus reduce corruption.