Resource Dependence and the Causes of Local Economic Growth: An Empirical Investigation

Previous research has found that in Indonesia, a resource giant in South East Asia, resource dependence is positively associated with economic growth, contrary to a 'resource curse' hypothesis. We test four potential causal mechanisms for this positive effect: spill overs to manufacturing, higher education provision, improvements in institutional quality, and investment in public capital. We follow 390 districts within Indonesia from 2006 to 2015, using four alternative measures of resource dependence, and instrumenting for their potential endogeneity. We first confirm a positive overall effect of resource dependence on real per capita Gross Regional Domestic Product. We then test the extent to which resource dependence positively affects manufacturing, education, public investment, and district institutional quality. We finally test the extent to which these factors contribute to growth. We find that resource dependence aids growth in part by raising measures of district institutional quality. Resource dependence also raises net high school enrolment rates, though we do not find that this in turn raises growth. Conversely, while higher capital spending by districts raises growth, we find no evidence that this share is affected by resource dependence. In auxiliary analysis, we find little support for the hypothesis that resource dependence benefits growth more (or only) for districts that begin with higher institutional quality.