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Natural resource curse: Mediating effects of fiscal policy

Author

Listed:
  • Nyiwul, Linus
  • Hu, Zhining
  • Koirala, Niraj P.

Abstract

The ‘resource curse’ literature has predominantly focused on identifying causes and channels of the ‘curse’, while literature on how to mitigate it remains largely at the theoretical or analytical level. In this paper, we examine the role of fiscal policy in mitigating the negative effect of natural resource dependence on economic growth. Using a sample of 150 countries for the period of 1990-2021, we apply a panel instrumental variable (IV) estimation to identify the nature of the relationship between economic growth, resource dependence, and fiscal policy. We then apply a panel structural vector autoregression (SVAR) model to examine the dynamics of this relationship. Our results yield a nuanced picture: while expansionary fiscal policy can mitigate the negative effect of resource dependence, it also entails adverse consequences, particularly a reduction in economic growth, which partially offset its benefits. These findings are robust across five different measurements of natural resource dependence and are further corroborated by the panel SVAR analysis.

Suggested Citation

  • Nyiwul, Linus & Hu, Zhining & Koirala, Niraj P., 2025. "Natural resource curse: Mediating effects of fiscal policy," Structural Change and Economic Dynamics, Elsevier, vol. 75(C), pages 568-589.
    • Handle: RePEc:eee:streco:v:75:y:2025:i:c:p:568-589
    DOI: 10.1016/j.strueco.2025.08.012
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    Keywords

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q0 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General

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