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Natural Resources, Democracy and Corruption

  • Sambit Bhattacharyya
  • Roland Hodler

We study how natural resources can feed corruption and how this effect depends on the quality of the democratic institutions. Our game-theoretic model predicts that natural resources lead to an increase in corruption if the quality of the democratic institutions is relatively poor, but not otherwise. We use panel data covering the period 1980 to 2004 and 99 countries to test this theoretical prediction. Our estimates confirm that the relationship between resource abundance and corruption depends on the quality of the democratic institutions. In particular, resource abundance is positively associated with corruption only in countries that have endured a nondemocratic regime for more than 60 percent of the years since 1956. Our main results hold when we control for the effects of income, time varying common shocks, regional fixed effects and various additional covariates. They are also robust to various alternative measures of natural resources, corruption and the quality of the democratic institutions. These findings imply that democratization can be a powerful tool to reduce corruption in resource-rich countries.

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File URL: http://www.economics.unimelb.edu.au/downloads/wpapers-08/1047.pdf
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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 1047.

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Length: 36 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:mlb:wpaper:1047
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Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia

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Web page: http://fbe.unimelb.edu.au/economics
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