Abstract

We exploit differences in European mortality rates to estimate the effect of institutions on economic performance. Europeans adopted very different colonisation policies in different colonies, with different associated institutions.

In places where Europeans faced high mortality rates, they could not settle and were more likely to set up extractive institutions. These institutions persisted to the present.

Exploiting differences in European mortality rates as an instrument for current institutions, we estimate large effects of institutions on income per capita. Once the effect of institutions is controlled for, countries in Africa or those closer to the equator do not have lower incomes.

Abstract

This paper summarises and extends previous research that has shown evidence of a `curse of natural resources', countries with great natural resource wealthtend nevertheless to grow more slowly than resource-poor countries.

This result is not easily explained by other variables, or by alternative ways to measure resource abundance.

This paper shows that there is little direct evidence that omitted geographical or climate variables explain the curse, or that there is a bias resulting from some other unobserved growth deterrent.

Resource-abundant countries tended to be high-price economies and, perhaps as a consequence, these countries tended to miss-out on export-led growth.

Introduction

The curse of natural resources, the observation that countries rich in natural resources tend to perform badly, has been shown empirically and analysed in a number of recent studies. These studies, which include Auty (1990), Gelb (1988), Sachs and Warner (1995, 1999), and Gylfason et al. (1999), among others, have emerged late in the 20th century, as evidence accumulated on the poor growth experience of resource-rich countries in the post-world-war II period.

On an intellectual level, this issue, emerged as an important international issue during the inter-war period in Latin America, after many Latin American economies suffered from the global slump in commodity prices. 

• However during this time and in the immediate post-war period, the skepticism about natural resource-led development was rooted in forecasts of declining global demand and prices.

• What the studies based on the post-war experience have argued is that the curse of natural resources is a demonstrable empirical fact, even after controlling for trends in commodity prices.

• Since so many poorer countries still have abundant natural resources, it is important to better understand the roots of failure in natural resource-led development.

• There have always been two important questions raised by the curse of natural resources. Is it true? If so, why? 

• Section 1 discusses the evidence on the question, Section 2 the second.

Does the Curse Really Exist?

Empirical support for the curse of natural resources is not bulletproof, but it is quite strong.

1. First, casual observation suggests that there is virtually no overlap in the set of countries that have large natural resource endowments, and the set of countries that have high levels of GDP.

• Many resource-rich countries have been resource rich for a long time.

• If natural resources really do help development, why do not we see a positive correlation today between natural wealth and other kinds of economic wealth?

2. Second, casual observation also confirms that extremely resource-abundant countries such as the Oil States in the Gulf, or Nigeria, or Mexico and Venezuela, have not experienced sustained rapid economic growth.

In addition, empirical growth studies tend to confirm this casual evidence.

• The finding in repeated regressions using growth data from the post-war period is that high resource intensity tends to correlate with slow growth.

• This finding is not easily explained by other variables, since this empirical result survives the introduction of a long list of control variables.

• It is also not easily explained as an accident from the special experience of the Persian Gulf states, since most of these states drop out of regression samples for lack of data on other control variables.

• In addition the finding survives statistical procedures for eliminating unusual observations.

  • For some examples of the evidence, Sachs and Warner (1997) show regression evidence of the curse of natural resources with as many as nine additional regressors, and Sachs and Warner (1995) show regression evidence for the curse after controlling for popular variables favoured by four other empirical growth studies.

• In more recent work, Sala-i-Martin (1997) and Doppelhofer et al. (2000) classify natural resources as one of the ten most robust variables in empirical studies on economic growth.

On this basis we assert that the variance of growth performance among resource rich countries is primarily due to how resource rents are distributed via the institutional arrangement.

The distinction we make is between producer friendly user on functioning bureaucracy, and corruption. 

• Grabber friendly institutions can be particularly bad for growth when resource abundance attracts scarce entrepreneurial resources out of production and into unproductive activities.

• With producer friendly institutions, however, rich resources attract entrepreneurs into production, implying higher growth. 

How Friendly Institutions Foster Economic Growth Through Natural Resource Abundance (Through International Trade)

Our approach contrasts the rent-seeking story that Sachs and Warner (1995) considered but dismissed in favour of a Dutch disease explanation.

• The rent seeking hypothesis they explored states that resource abundance leads to a deterioration of institutional quality in turn lowering economic growth.

• Sachs and Warner found that this mechanism was empirically unimportant.

• However, the lack of evidence for institutional decay caused by resource abundance is not sufficient to dismiss the role of institutions.

• Institutions may be decisive for how natural resources affect economic growth even if resource abundance has no effect on institutions.

• We claim that natural resources put the institutional arrangements to a test, so that the resource curse only appears in countries with inferior institutions. 

• This hypothesis is consistent with observations from several countries:

  • Botswana, with 40% of GDP stemming from diamonds, has had the world’s highest growth rate since 1965.

    • Acemoglu et al. (2002) attribute this remarkable performance to the good institutions of Botswana.

    • (Among African countries Botswana has the best score on the Groningen Corruption Perception Index).

  • Another example is Norway , one of Europe’s poorest countries in 1900, but now one of its richest.

    • The growth was led by natural resources such as timber, fish and hydroelectric power and more recently oil and natural gas.

    • Norway is considered one of the least corrupt countries in the world.

• Similarly, in the century following 1850 the US exploited natural resources intensively.

• David and Wright (1997) argue that the positive feedbacks of this resource extraction explain much of the later economic growth.

Natural Resource Rents aided by Grabber Friendly Institutions

There are also many examples of slow growth among resource rich countries with weak institutions.

Lane and Tornell (1996) and Tornell and Lane (1999) explain the disappointing economic performance after the oil windfalls in Nigeria, Venezuela, and Mexico by dysfunctional institutions that invite grabbing.

Ades and Di Tella (1999) use cross-country regressions to show how natural resource rents may stimulate corruption among bureaucrats and politicians.

Acemoglu et al. (2004) argue that higher resource rents make it easier for dictators to buy off political challengers.

In the Congo the enormous natural resource wealth including 15% of the world’s copper deposits, vast amounts of diamonds, zinc, gold, silver, oil, and many other resources [...] gave Mobutu a constant flow of income to help sustain his power . (p. 171) 

Resource abundance increases the political benefits of buying votes through inefficient redistribution. Such perverse political incentives of resource abundance are only mitigated in countries with adequate institutions. On this our approach complements recent political economy papers such as Acemoglu and Robinson (2002), Robinson et al. (2002) and Acemoglu et al. (2004). 

Basic Security

Other examples of slow growth among resource rich countries are the many cases where the government is unable to provide basic security.

In such countries resource abundance stimulates violence, theft and looting, by financing rebel groups, warlord competition (Skaperdas, 2002), or civil wars.

In their study of civil wars Collier and Hoeffler (2000) find that the extent of primary commodity exports is the largest single influence on the risk of conflict  (p. 26). The consequences for growth can be devastating.

Lane (1958) argues that the most weighty single factor in most periods of growth, if any one factor has been most important, has been a reduction in the resources devoted to war  (p. 413). 

Our main focus in the theoretical part of the article is the allocation of entrepreneurs between production and unproductive rent extraction (grabbing).

• Clearly grabbing harms economic development.

• Depending on the quality of institutions, however, loot-able resources may or may not induce entrepreneurs to specialise in grabbing.

• In the empirical part we build on Sachs and Warner (1997a), whose result that natural resource abundance affects growth negatively has earlier been shown to be rather robust when controlling for other factors: see Sachs and Warner (1995, 1997a, b, 2001).

• We extend these growth regressions by allowing for the growth effects of natural resources to depend on the quality of institutions.

• Our main finding is that the resource curse applies in countries with grabber friendly institutions but not in countries with producer friendly institutions. 

This finding is consistent with our model but is in contrast to earlier resource curse models, such as the Dutch disease models by van Wijnbergen (1984), Krugman (1987) and Sachs and Warner (1995), and the rent-seeking models by Lane and Tornell (1996), Tornell and Lane (1999) and Torvik (2002). All these models imply that there is an unconditional negative relationship between resource abundance and growth.