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Can the Natural Resource Curse Be Turned into a Blessing? The Role of Trade Policies and Institutions

Rabah Arezki () and Frederick (Rick) van der Ploeg ()

No ECO2007/35, Economics Working Papers from European University Institute

Abstract: We criticise existing empirical results on the detrimental effects of natural resource dependence on the rate of economic growth after controlling for institutional quality, openness and initial income. These results do not survive once we use instrumental variables to correct for the endogenous nature of the explanatory variables. Furthermore, they suffer from omitted variables bias as they over-estimate the effect of initial income per capita and thus under-estimate the speed of conditional convergence. Instead, we provide new evidence for the impact of natural resource dependence on income per capita in a systematic empirical cross-country framework. In addition to a significant negative direct impact of natural resources on income per capita, we find significant indirect effect of natural resources on institutions. We allow for interaction effects and provide evidence that the natural resource curse is particularly severe for economic performance in countries with a low degree of trade openness. Adopting policies directed toward more trade openness may thus soften the impact of a resource curse. We also check the robustness of our results by using a variety of instruments and also employing the ratio of natural capital rather than natural resource exports to national income as an explanatory variable. We find evidence that resource abundance, measured by the stock of natural capital, also induces a resource curse, but less severely for countries that are relatively open.

Keywords: resource curse; resource dependence; resource abundance; natural capital; institutional quality; openness; geography; interaction effects; instruments; trade policies; growth performance; income per capita; cross-country evidence (search for similar items in EconPapers)
JEL-codes: C21 C82 O11 O41 Q30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-env
Date: 2007
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Related works:
Working Paper: Can The Natural Resource Curse Be Turned Into A Blessing? The Role of Trade Policies and Institutions (2008) Downloads
Working Paper: Can the Natural Resource Curse Be Turned Into a Blessing? The Role of Trade Policies and Institutions (2007) Downloads
Working Paper: Can the Natural Resource Curse Be Turned Into a Blessing? The Role of Trade Policies and Institutions (2007) Downloads
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