Resource Curse: New Evidence on the Role of Institutions

Abstract

This paper attempts to provide a probable answer to a longstanding resource curse puzzle; i.e., why resource-rich nations grow at a slower rate compared with less fortunate ones. Using an innovative threshold estimation technique, the empirical results reveal that there is a threshold effect in the natural resources–economic growth relationship. We find that the impact of natural resources is meaningful to economic growth only after a certain threshold point of institutional quality has been attained. The results also shed light on the fact that the nations that have low institutional quality depend heavily on natural resources while countries with high quality institutions are relatively less dependent on natural resources to generate growth.

• Economic development
• natural resource curse
• institutions

JEL CLASSIFICATIONS:

• O11
• O13
• Q32

Acknowledgements

We are very grateful to anonymous referees and Sunwoong Kim, the Co-Editor of the International Economic Journal, whose constructive comments have helped to improve the quality of the paper. We are also grateful to Christa Brunnschweiler for her comments.

Notes

¹Leite and Weidmann (1999) explain that the negative associations between institutions, resource abundance, and economic growth are insufficient in establishing the direction of causality. Questions regarding the cause and the effect still remain unresolved. However, these researchers are in the position to argue that poor institutions are a result of resource abundance rather than the cause.