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Public Capital in Resource Rich Economies: Is there a Curse?

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  • Sambit Bhattacharyya
  • Paul Collier

Abstract

As poor countries deplete their natural resources, for increased consumption to be sustainable some of the revenues should be invested in other public assets.� Further, since such countries typically have acute shortages of public capital, the finance from resource depletion is an opportunity for needed public investment.� Using a new global panel dataset on public capital and resource rents covering the period 1970 to 2005 we find that, contrary to these expectations, resource rents significantly and substantially reduce the public capital stock.� This is more direct evidence for a policy-based 'resource curse' than the conventional, indirect evidence from the relationships between resource endowments, growth and income.� The adverse effect on public capital is mitigated by good economic and political institutions and worsened by GDP volatility and ethnic fractionalization.� Rents from depleting resources have more adverse effects than those that are sustainable.� Our main results are robust to a variety of controls, and to instrumental variable estimation using commodity price and rainfall as instruments, Arellano-Bond GMM estimation, as well as across different samples and data frequencies.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number WPS/2011-14.

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Date of creation: 01 Aug 2011
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Handle: RePEc:oxf:wpaper:wps/2011-14

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Keywords: Natural resources; Public capital;

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References

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  1. Christophe Kamps, 2006. "New Estimates of Government Net Capital Stocks for 22 OECD Countries, 1960-2001," IMF Staff Papers, Palgrave Macmillan, vol. 53(1), pages 6.
  2. Bhattacharyya, Sambit & Hodler, Roland, 2010. "Natural resources, democracy and corruption," European Economic Review, Elsevier, Elsevier, vol. 54(4), pages 608-621, May.
  3. Zac Mills & Annette Kyobe & Jim Brumby & Chris Papageorgiou & Era Dabla-Norris, 2011. "Investing in Public Investment," IMF Working Papers 11/37, International Monetary Fund.
  4. Frederick van der Ploeg & Anthony J. Venables, 2011. "Harnessing Windfall Revenues: Optimal Policies for Resource‐Rich Developing Economies," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 121(551), pages 1-30, March.
  5. Romp, Ward & de Haan, Jakob, 2005. "Public capital and economic growth: a critical survey," EIB Papers 2/2005, European Investment Bank, Economics Department.
  6. Hausman, Jerry & Stock, James H. & Yogo, Motohiro, 2005. "Asymptotic properties of the Hahn-Hausman test for weak-instruments," Economics Letters, Elsevier, Elsevier, vol. 89(3), pages 333-342, December.
  7. Torvik, Ragnar, 2002. "Natural resources, rent seeking and welfare," Journal of Development Economics, Elsevier, Elsevier, vol. 67(2), pages 455-470, April.
  8. van der Ploeg, Frederick, 2006. "Challenges and Opportunities for Resource Rich Economies," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5688, C.E.P.R. Discussion Papers.
  9. James A. Robinson & Ragnar Torvik & Thierry Verdier, 2003. "Politcal Foundations of the Resource Curse," DELTA Working Papers, DELTA (Ecole normale supérieure) 2003-33, DELTA (Ecole normale supérieure).
  10. Sambit Bhattacharyya & Roland Hodler, 2010. "Do Natural Resource Revenues Hinder Financial Development?� The Role of Political Institutions," Economics Series Working Papers CSAE WPS/2010-40, University of Oxford, Department of Economics.
  11. Hamilton, Kirk & Clemens, Michael, 1999. "Genuine Savings Rates in Developing Countries," World Bank Economic Review, World Bank Group, World Bank Group, vol. 13(2), pages 333-56, May.
  12. Romain Wacziarg & Karen Horn Welch, 2003. "Trade Liberalization and Growth: New Evidence," NBER Working Papers 10152, National Bureau of Economic Research, Inc.
  13. Collier, Paul & Hoeffler, Anke, 2009. "Testing the neocon agenda: Democracy in resource-rich societies," European Economic Review, Elsevier, Elsevier, vol. 53(3), pages 293-308, April.
  14. Paul Collier & Benedikt Goderis, 2007. "Prospects for Commodity Exporters," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 8(2), pages 1-15, April.
  15. Paul Collier & Rick Van Der Ploeg & Michael Spence & Anthony J Venables, 2010. "Managing Resource Revenues in Developing Economies," IMF Staff Papers, Palgrave Macmillan, vol. 57(1), pages 84-118, April.
  16. Jonathan Isham & Michael Woolcock & Lant Pritchett & Gwen Busby, 2005. "The Varieties of Resource Experience: Natural Resource Export Structures and the Political Economy of Economic Growth," World Bank Economic Review, World Bank Group, World Bank Group, vol. 19(2), pages 141-174.
  17. Blattman, Christopher & Hwang, Jason & Williamson, Jeffrey G., 2007. "Winners and losers in the commodity lottery: The impact of terms of trade growth and volatility in the Periphery 1870-1939," Journal of Development Economics, Elsevier, Elsevier, vol. 82(1), pages 156-179, January.
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Citations

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Cited by:
  1. Sambit Bhattacharyya, 2011. "Political Origins of Financial Structure," Economics Series Working Papers WPS/2011-20, University of Oxford, Department of Economics.
  2. Sambit Bhattacharyya & Roland Hodler, 2010. "Do Natural Resource Revenues Hinder Financial Development?� The Role of Political Institutions," Economics Series Working Papers CSAE WPS/2010-40, University of Oxford, Department of Economics.
  3. Frederick van der Ploeg & Anthony J. Venables, 2012. "Natural Resource Wealth: The Challenge of Managing a Windfall," Annual Review of Economics, Annual Reviews, Annual Reviews, vol. 4(1), pages 315-337, 07.
  4. Ilham Haouas & Raimundo Soto, 2012. "Has the UAE Escaped the Oil Curse?," Documentos de Trabajo, Instituto de Economia. Pontificia Universidad Católica de Chile. 412, Instituto de Economia. Pontificia Universidad Católica de Chile..

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