The blessing and curse of natural resource dependence: A stochastic frontier analysis on productivity, resource rent, governance and sustainability

This study examines the relationship between natural resource dependence and total factor productivity (TFP) and how institutional governance and CO2 emissions condition this relationship. Natural resources are finite with limited scalability; consequently, resource-rich economies must eventually diversify, incurring an opportunity cost in the form of potential productivity losses when capital is reallocated from established extractive sectors. To quantify this opportunity cost, we apply a stochastic frontier framework to a panel of resource-dependent countries, allowing the marginal effect of natural resource rents on TFP to be recovered through the estimation of technical inefficiency. The results indicate that greater resource dependence generally raises TFP, but only in environments characterised by weak governance and high CO2 emissions. However, below a certain threshold level of dependence, improved institutional governance emerges as the principal driver of productivity. Two policy actions follow. First, consolidate and effectively regulate the extractive sector to capture the scale economies. Second, reallocate a portion of the resulting higher natural resource rents to more productive industries in which the country possesses a comparative advantage, including frontier industries. The successful implementation of these policy actions hinges on improved governance that boosts efficiency and transparency. In turn, economic diversification presents an opportunity for a green transition due to traditional extractive industries being compelled to modernise extraction with cleaner, more efficient capital in anticipation of a shift in labour toward emerging growth sectors.