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The Natural Resource Curse, Fiscal Decentralization, and Agglomeration Economies

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  • Raveh, Ohad
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    Abstract

    Natural resource abundance is a blessing for some countries, yet is a curse for others. The degree of fiscal decentralization may account for this divergent outcome. Resources tend to locate in remote, non-agglomerated, and sparsely populated areas; a high degree of fiscal decentralization gives a resource abundant region an advantage in the inter-regional tax competition over capital so that it attracts some capital from agglomerated and densely populated regions. Given a sufficiently high agglomeration level, any such movement of capital would bring a loss of output in the agglomerated region that outweighs the sum of gains from resource income and increased output in the remote region – so that aggregate product in the economy drops. This theory is empirically tested -and confirmed- building on Sachs and Warner’s influential works on the resource curse, employing the World Bank’s Fiscal Decentralization Indicators, and taking the United States as a case study.

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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 29664.

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    Date of creation: Jan 2011
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    Handle: RePEc:pra:mprapa:29664

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    Keywords: Natural Resources; Economic Growth; Resource Curse; Fiscal Decentralization; Agglomeration Economies; Tax Competition;

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    1. Sachs, J-D & Warner, A-M, 1995. "Natural Resource Abundance and Economic Growth," Papers, Harvard - Institute for International Development 517a, Harvard - Institute for International Development.
    2. Sachs, Jeffrey D. & Warner, Andrew M., 1999. "The big push, natural resource booms and growth," Journal of Development Economics, Elsevier, Elsevier, vol. 59(1), pages 43-76, June.
    3. Oates, Wallace E., 1993. "Fiscal Decentralization and Economic Development," National Tax Journal, National Tax Association, vol. 46(2), pages 237-43, June.
    4. Gylfason, Thorvaldur, 2001. "Natural resources, education, and economic development," European Economic Review, Elsevier, Elsevier, vol. 45(4-6), pages 847-859, May.
    5. Tao Zhang & Heng-fu Zou, 1996. "Fiscal decentralization, public spending, and economic growth in China," Policy Research Working Paper Series, The World Bank 1608, The World Bank.
    6. Carlos Leite & Jens Weidmann, 1999. "Does Mother Nature Corrupt," IMF Working Papers, International Monetary Fund 99/85, International Monetary Fund.
    7. Torvik, Ragnar, 2002. "Natural resources, rent seeking and welfare," Journal of Development Economics, Elsevier, Elsevier, vol. 67(2), pages 455-470, April.
    8. Papyrakis, Elissaios & Gerlagh, Reyer, 2004. "The resource curse hypothesis and its transmission channels," Journal of Comparative Economics, Elsevier, vol. 32(1), pages 181-193, March.
    9. Rodriguez, Francisco & Sachs, Jeffrey D, 1999. " Why Do Resource-Abundant Economies Grow More Slowly?," Journal of Economic Growth, Springer, Springer, vol. 4(3), pages 277-303, September.
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