Mechanisms of Resource Curse, Economic Policy and Growth

This paper analyzes economic policies in resource rich countries and various mechanisms of resource curse leading to a potentially inefficient use of resources. Arguments are provided in favor of "conditional resource curse" hypothesis: resource abundance hampers growth if institutions of a country are weak. We study the impact of the resource abundance on budget deficit and inflation, foreign exchange reserves and real exchange rate, as well as policies of maintaining low domestic fuel and energy prices. We show that lower domestic fuel prices, that are typical for resource rich countries, have a positive effect on investment in R&D and fixed capital stock, and on long term growth, even though they are associated with losses resulting from higher energy intensity. However, in resource rich countries real exchange rate is generally higher than in other countries. Besides, resource abundance leads to corruption of institutions, especially if these institutions were not strong in the beginning of the period. While there is no solid evidence that, on average, resource abundant countries grow more slowly than the others, there is evidence that they use resources less efficiently, if their institutions are weak.