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Volatility, Financial Development and the Natural Resource Curse

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  • Frederick van der Ploeg
  • Steven Poelhekke

Abstract

Cross-country evidence is presented on resource dependence and the link between volatility and growth. First, growth depends negatively on volatility of unanticipated output growth independent of initial income per capita, the average investment share, initial human capital, trade openness, the national income share of natural resource exports and population growth. Second, the adverse effect of resources on growth operates primarily through higher volatility. The positive effect of resources on growth is positive, but can be swamped by the indirect negative effect through volatility. Third, with well developed financial sectors, the resource curse is less pronounced. Fourth, landlocked countries with ethnic tensions have higher volatility and lower growth. Fifth, restrictions on the current account lead to higher volatility and lower growth, but capital account restrictions lower volatility and boost growth. These effects are especially strong in resource-rich countries. We also present IV-estimates to correct for the endogenous nature of investment rates and panel estimates to allow for possible changes in explanatory variables over time. Our key message is that volatility is a quintessential feature of the resource curse.

Suggested Citation

  • Frederick van der Ploeg & Steven Poelhekke, 2007. "Volatility, Financial Development and the Natural Resource Curse," Economics Working Papers ECO2007/36, European University Institute.
  • Handle: RePEc:eui:euiwps:eco2007/36
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    Cited by:

    1. Jeffrey Frankel, 2014. "Mauritius: African Success Story," NBER Chapters,in: African Successes, Volume IV: Sustainable Growth, pages 295-342 National Bureau of Economic Research, Inc.
    2. Jeffrey Frankel, 2017. "How to Cope with Volatile Commodity Export Prices: Four Proposals," CID Working Papers 335, Center for International Development at Harvard University.
    3. David S. Jacks & Kevin H. O'Rourke & Jeffrey G. Williamson, 2011. "Commodity Price Volatility and World Market Integration since 1700," The Review of Economics and Statistics, MIT Press, pages 800-813.
    4. International Monetary Fund, 2008. "Democratic Republic of Timor-Leste; Selected Issues and Statistical Appendix," IMF Staff Country Reports 08/203, International Monetary Fund.
    5. Steve Bond & Stephen R. Bond & Adeel Malik, 2008. "Natural resources, export structure and investment," Economics Series Working Papers CSAE WPS/2008-20, University of Oxford, Department of Economics.
    6. Giovanni Federico & Michelangelo Vasta, 2009. "Was industrialization an escape from the commodity lottery? Evidence from Italy, 1861-1940," Department of Economics University of Siena 573, Department of Economics, University of Siena.
    7. Jeffrey Frankel, 2013. "A Solution to Fiscal Procyclicality: The Structural Budget Institutions Pioneered by Chile," Central Banking, Analysis, and Economic Policies Book Series,in: Luis Felipe Céspedes & Jordi Galí (ed.), Fiscal Policy and Macroeconomic Performance, edition 1, volume 17, chapter 9, pages 323-391 Central Bank of Chile.
    8. Pop Larisa Nicoleta, 2015. "Examining The Price Volatility On Agricultural Markets – Challenges And Implications Of The Current Economic Outline," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 3, pages 15-20, June.
    9. Frankel, Jeffrey A., 2010. "The Natural Resource Curse: A Survey," Scholarly Articles 4454156, Harvard Kennedy School of Government.
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    11. Elisa Ticci, 2011. "Extractive Industries and Local Development in the Peruvian Highlands: Socio-Economic Impacts of the Mid-1990s Mining Boom," RSCAS Working Papers 2011/14, European University Institute.
    12. Sambit Bhattacharyya & Jeffrey G. Williamson, 2011. "Commodity Price Shocks And The Australian Economy Since Federation," Australian Economic History Review, Economic History Society of Australia and New Zealand, vol. 51(2), pages 150-177, July.
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    16. Banegas Rivero, Roger Alejandro & González Vergara, Reyna, 2015. "Cambios institucionales y transición cíclica en la posición fiscal para Bolivia (2003-2011)," Revista Latinoamericana de Desarrollo Economico, Instituto de Investigaciones Socio-Económicas (IISEC), Universidad Católica Boliviana, issue 23, pages 67-96, Mayo.

    More about this item

    Keywords

    volatility; growth; resource curse; financial development; openness; landlocked; ethnic tensions; restrictions on current and capital account;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development

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