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Can the Natural Resource Curse Be Turned into a Blessing? The Role of Trade Policies and Institutions

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  • Rabah Arezki
  • Frederick van der Ploeg

Abstract

We criticise existing empirical results on the detrimental effects of natural resource dependence on the rate of economic growth after controlling for institutional quality, openness and initial income. These results do not survive once we use instrumental variables to correct for the endogenous nature of the explanatory variables. Furthermore, they suffer from omitted variables bias as they over-estimate the effect of initial income per capita and thus under-estimate the speed of conditional convergence. Instead, we provide new evidence for the impact of natural resource dependence on income per capita in a systematic empirical cross-country framework. In addition to a significant negative direct impact of natural resources on income per capita, we find significant indirect effect of natural resources on institutions. We allow for interaction effects and provide evidence that the natural resource curse is particularly severe for economic performance in countries with a low degree of trade openness. Adopting policies directed toward more trade openness may thus soften the impact of a resource curse. We also check the robustness of our results by using a variety of instruments and also employing the ratio of natural capital rather than natural resource exports to national income as an explanatory variable. We find evidence that resource abundance, measured by the stock of natural capital, also induces a resource curse, but less severely for countries that are relatively open.

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Bibliographic Info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2007/35.

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Date of creation: 2007
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Handle: RePEc:eui:euiwps:eco2007/35

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Keywords: resource curse; resource dependence; resource abundance; natural capital; institutional quality; openness; geography; interaction effects; instruments; trade policies; growth performance; income per capita; cross-country evidence;

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Citations

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Cited by:
  1. van der Ploeg, Frederick, 2010. "Why do many resource-rich countries have negative genuine saving?: Anticipation of better times or rapacious rent seeking," Resource and Energy Economics, Elsevier, vol. 32(1), pages 28-44, January.
  2. Stela Cani, 2009. "Resource Abundance, Mineral Funds and Institutional Quality," Economics & Management Discussion Papers em-dp2009-04, Henley Business School, Reading University.
  3. Paul Collier & Benedikt Goderis, 2007. "Commodity Prices, Growth, and the Natural Resource Curse: Reconciling a Conundrum," Economics Series Working Papers WPS/2007-15, University of Oxford, Department of Economics.
  4. Paul Collier & Frederick van der Ploeg & Michael Spence & Anthony J Venables, 2009. "Managing Resource Revenues in Developing Economies," OxCarre Working Papers 015, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  5. Naude, Wim, 2008. "Conflict, Disasters, and No Jobs: Reasons for International Migration from Sub-Saharan Africa," Working Papers RP2008/85, World Institute for Development Economic Research (UNU-WIDER).
  6. Khalid R. Alkhater, 2012. "The Rentier Predatory State Hypothesis: An Empirical Explanation Of The Resource Curse," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 37(4), pages 29-60, December.
  7. Mohaddes, K. & Pesaran, M.H., 2013. "One Hundred Years of Oil Income and the Iranian Economy: A curse or a Blessing?," Cambridge Working Papers in Economics 1302, Faculty of Economics, University of Cambridge.
  8. Naude, Wim & Rossouw, Riaan, 2008. "Export Diversification and Specialization in South Africa: Extent and Impact," Working Papers RP2008/93, World Institute for Development Economic Research (UNU-WIDER).
  9. Leong, W. & Mohaddes, K., 2011. "Institutions and the Volatility Curse," Cambridge Working Papers in Economics 1145, Faculty of Economics, University of Cambridge.
  10. Ibrahim Ahmed Elbadawi & Raimundo Soto, 2012. "Resource Rents, Political Institutions and Economic Growth," Documentos de Trabajo 413, Instituto de Economia. Pontificia Universidad Católica de Chile..
  11. Malebogo Bakwena & Philip Bodman & Thanh Le & KK Tang, . "Avoiding the Resource Curse: The Role of Institutions," MRG Discussion Paper Series 3209, School of Economics, University of Queensland, Australia.

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