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Resource rents, economic growth, and the role of institutional quality: A panel threshold analysis

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  • Abdulahi, Mohamued Elyas
  • Shu, Yang
  • Khan, Muhammad Asif

Abstract

This study uses rule of law (i.e., institutional quality; IQ) as a threshold variable and revisits the nonlinear relationship between natural resource rent and economic growth under the resource curse hypothesis. The research utilizes the panel data of 14 resource-rich countries of sub-Saharan Africa (SSA) to identify possible threshold level(s) and to assess the effects using conventional OLS standard error and White-correlated standard error models. The empirical results confirm the existence of two significant threshold effects, indicating a positive relationship between resource rent and economic growth when a country's IQ is above the threshold level of −1.28 and within the range −1.28 to −1.37. However, below the threshold level of −1.37, the resource curse starts to operate, impeding economic growth. The results are robust under the alternative specification of system generalized methods of moment (GMM). Therefore, in contrast to linear and exogenous threshold estimations, this paper shows the required IQ threshold levels for SSA resource-rich countries where they can ensure economic growth using their natural resource windfalls. Failing to account for the endogenous nonlinearities may conceal both the required minimum threshold levels of countries to maintain economic growth and the dynamic effects of IQ. Thus, we recommend policymakers and researchers consider the pivotal role of the threshold effects of IQ to allow for sustainable economic growth.

Suggested Citation

  • Abdulahi, Mohamued Elyas & Shu, Yang & Khan, Muhammad Asif, 2019. "Resource rents, economic growth, and the role of institutional quality: A panel threshold analysis," Resources Policy, Elsevier, vol. 61(C), pages 293-303.
  • Handle: RePEc:eee:jrpoli:v:61:y:2019:i:c:p:293-303
    DOI: 10.1016/j.resourpol.2019.02.011
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    More about this item

    Keywords

    P48; O47; E02; O43; O13; Resource rent; Economic growth; Resource curse; Rule of law; Resource-rich; Threshold;

    JEL classification:

    • P48 - Economic Systems - - Other Economic Systems - - - Political Economy; Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

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