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The Volatility Curse: Revisiting the Paradox of Plenty

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  • Frederick Van der Ploeg
  • Steven Poelhekke

Abstract

The volatility of unanticipated output growth in income per capita is detrimental to long-run development, controlling for initial income per capita, population growth, human capital, investment, openness and natural resource dependence. This effect is significant and robust over a wide range of specifications. We unravel the effects of volatility by opening the black box and conditioning the variance of growth shocks on several country characteristics. Natural resource dependence, physical and institutional barriers to trade and associated policy shocks increase volatility sharply and harm growth through this indirect channel. The robust indirect effect of natural resources through volatility trumps any direct effects on economic development, even if natural resource dependence is measured net of extraction costs. Financial development appears to mitigate the harmful causes of volatility. Our panel data estimation confirms our cross-country results, but we also offer evidence that well developed financial systems amplify the effect of short-term terms-of-trade volatility on macroeconomic volatility.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2616.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2616

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Keywords: volatility; growth; resource curse; financial development;

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Cited by:
  1. Marcelo Martinez & Montfort Mlachila, 2013. "The Quality of the Recent High-Growth Episode in Sub-Saharan Africa," IMF Working Papers, International Monetary Fund 13/53, International Monetary Fund.
  2. Vittorio Daniele, 2011. "Natural Resources and the 'Quality' of Economic Development," Journal of Development Studies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 47(4), pages 545-573.
  3. World Bank, 2009. "Sudan - The Road Toward Sustainable and Broad-Based Growth," World Bank Other Operational Studies 3183, The World Bank.
  4. Kurronen, Sanna, 2012. "Financial sector in resource-dependent economies," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 6/2012, Bank of Finland, Institute for Economies in Transition.
  5. Eisgruber, Lasse, 2013. "The resource curse: Analysis of the applicability to the large-scale export of electricity from renewable resources," Energy Policy, Elsevier, Elsevier, vol. 57(C), pages 429-440.
  6. World Bank, 2009. "Sudan - Toward Sustainable and Broad-Based Growth," World Bank Other Operational Studies 3169, The World Bank.

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