Resource Windfalls and the Accumulation of Productive Capabilities

Can resource windfalls explain the accumulation of productive capabilities? We examine this question using a panel of 140 countries over the period 1995-2023, leveraging plausibly exogenous variation in international commodity prices through countries' predetermined net export structures. We find that resource windfalls have a robust negative effect on productive capabilities. Using our preferred dynamic specifications, a one-standard-deviation increase in resource windfalls is associated with a long-run decline in productive capabilities of approximately 0.10 standard deviations. Beyond the average effect, we document substantial heterogeneity across countries. The adverse effects are concentrated among lower-income and initially less sophisticated economies, while richer and more sophisticated economies exhibit greater resilience to resource windfalls. We also provide evidence suggesting that resource windfalls alter the composition of investment in ways that contribute relatively little to capability accumulation. Our findings suggest that resource windfalls may hinder structural transformation by slowing the accumulation of productive capabilities.