Colonialism, Institutional Quality, and the Resource Curse

This paper tests the hypotheses that (1) European colonization indirectly hinders the development outcomes, namely GDP per capita growth, by lowering institutional quality and encouraging corruption in colonized oil-rich countries, and (2) better macro institutional quality mitigates the historically-rooted resource curse. We constructed the instrumental variable by categorizing countries based on the evidence of settlers' mortality and the persistence of European colonial languages as official post-independence languages in oil-rich non-western countries. Also, we isolate the effect of giant oil discoveries with the depth of oil fields because of the plausible relationship with the geological characteristics of oil formation. We estimate a 2-Step GMM model that controls the lagged moments of GDP per capita using the data for 69 countries with at least a discovery of giant oil fields from 1960 to 2015. We show that oil-rich countries without colonial experience have better institutions, which translates to improving GDP per capita and reducing the corruption index. Our findings highlight the importance of historical factors associated with state origin when formulating policies to address the resource curse.