Volatility, Financial Development and the Natural Resource Curse

Frederick (Rick) van der Ploeg and Steven Poelhekke

No ECO2007/36, Economics Working Papers from European University Institute

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.

Keywords: volatility; growth; resource curse; financial development; openness; landlocked; ethnic tensions; restrictions on current and capital account (search for similar items in EconPapers)
JEL-codes: C12 C21 C23 F43 G20 O11 O41 Q32 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (37)

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Working Paper: Volatility, Financial Development and the Natural Resource Curse (2007)
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