Tuesday
May212013

The Economic Nature of the Resource Curse: Evidence  

So oil has been a curse for Cameroon.

Is it true more generally that natural resource wealth, or perhaps more specifically oil wealth, has a negative effect on economic growth? If it does, via what mechanisms?

Before we start thinking about mechanisms let’s focus on the cross-national evidence. In fact, the more careful evidence does not suggest that there is such an unconditional effect.

Early work by Jeffrey Sachs and his collaborators suggested that this was the case. And it is true that the discovery and exploitation of oil in the Cameroon coincided with a massive economic decline and deterioration in human development.

But as we discuss in Chapter 14 of Why Nations Fail, this was not the case in Botswana where the diamond wealth has been a key part of the economic and human development success of the country. Other obvious examples of resource wealth helping economic development include Australia, Chile, Norway and the United States.

So the claim that the average effect of natural resource wealth on economic growth is negative must either be wrong or uninteresting – meaning that the heterogeneous effect of resource wealth in different contexts are what is really interesting to study. What context? As we point out in Why Nations Fail, Botswana’s distinctive characteristic was its institutional development prior to the discovery of diamonds.

It is also obvious that while Cameroon had poor institutions in 1977, Australia, Chile, Norway and the US all had relatively good institutions when they benefitted from resource discoveries.

The idea that the economic impact of natural resources is conditional on the quality of institutions was brought home vividly in a paper by Karl Moene, Halvor Mehlum and Ragnar Torvik, “Institutions and the Resource Curse,”. (See also this related paper). The three Norwegians showed that there is only a “conditional resource curse” in the sense that there is a negative correlation between resource abundance (as measured by the ratio of primary exports to GDP in 1970) and economic growth for countries with low institutional quality. But the same correlation is positive for countries, such as Norway, with stronger institutions (or what we would call “inclusive institutions”).

There are of course many ways to measure institutional quality, and several of these measures are correlated. The three Norwegians created an institutional quality index as an un-weighted average of five indexes based on data from Political Risk Services: a rule of law index, a bureaucratic quality index, a corruption in government index, a risk of expropriation index, and a government repudiation of contracts index. Since many of the measures of institutions used in this literature are the outcomes of political processes, they are also closely related to policy outcomes. Thus this conditional resource curse bundles quite a large number of factors into what conditions the impact of resources which stretch all the way to fundamental aspects of the political institutions of a country (such as the nature of the constitution) to basic economic institutions (security of property rights), the nature of the state (bureaucratic quality) all the way to government policy (repudiation of contracts).

All the same, the paper produces a very important bottom line: to the extent that Cameroon did experience a resource curse after 1977 this was because some key facets of its institutions were initially poor.

What about the mechanisms? We will turn to this in our next post.

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