been implemented before the country becomes fiscally reliant on its natural wealth. In contrast, unrestrictive institutions release the sovereign from the need for negotiation and abolish the incentives for a positive institutional change.
However, this conclusion leads us to the problem of reverse causality. It is not clear whether institutional quality conditions the resource curse or resource abundance conditions the process of institutional development. In accordance with the appropriability hypotheses, the regressions of Table 17 prove that the interaction between institutions and resources determines the economic outcome, but they do not tell anything about the interaction itself. Due to the assumption of exogeneity199, empirical results were usually interpreted as if institutions were conditioning the growth effects of abundance. Meanwhile, the theory of endogenous institutions was also raising substantial academic support, especially due to the debate over the colonial origins of contemporary development (Acemoglu et al., 2012). In my point of view, the two interpretations are not necessarily contradictive. Most studies in favor of endogeneity suggest that resource abundance affects institutional development in a very specific way: It tends to increase regime survival as it slows down social and political change. In other words, institutions are said to be more persistent in case of high natural endowments. This might be a serious problem in a predatory dictatorship, but if a country had already implemented democratic free-market institutions, more political stability does not sound like a curse. Consequently, what really matters is the institutional quality at time when the resource deposits are getting discovered.
Unfortunately, endogenous institutions turn the resource curse into an extremely stubborn problem. This chapter has already demonstrated that economic growth failures follow from policy failures, which in turn are the consequences of poor institutional quality. Therefore, the key to escape the curse is to invest into better institutions.
However, such investments might be unprofitable due to the path-dependent nature of institutional change. Kolstad
& Wiig (2009b) argue that small, gradual changes aimed at the institutions themselves are very likely to fail as the underlying dynamics pulls the system back to the original equilibrium. Moreover, windfalls tend to enhance the stability of this equilibrium, which renders the chance of a successful institutional reform very close to zero. Hence, internal attempts and policy proposals are condemned to be a waste of effort until resource revenues maintain the old structures, elites, and leaders.
Although political economy was able to identify, describe, and explain most of the socioeconomic phenomena related to natural abundance, it did not deliver a universal solution for the problems of resource-driven development.
Moreover, the endogenous institutions thesis suggests that such a holy grail does not even exist. Overcoming the curse by internal institutional change is similar to a person who is trying to get out from the water by pulling his own hair. Chapter 6 will discuss that the only solution might be external because someone needs to drain the water from the swimming pool as a drowning person is unlikely to learn how to swim on the instant. Good institutions are the same: Countries need to develop them before jumping into the pool of nonrenewable resources. Until then, it would be indeed better to leave the natural wealth intact…
199 Wiens (2014) shows that implicitly, all the centralized theoretical models assume that institutional quality is exogenous.
5 Case studies
The previous chapters described all the major theoretical and empirical aspects of resource-driven development to outline our current state of understanding. Notwithstanding some minor details, now I find it reasonable to argue that the resource curse puzzle has been completed at least on the level of the broad concept200. While also trying to increase the resolution of the big picture, this chapter aims to demonstrate the potential of theoretical economics to explain a large variety of development outcomes. Hence, the following case studies deliberately represent very different resource-experiences in order to expose most of mechanisms discussed before.
Table 18: Comparative statistics201
Indicator / Notes Botswana Norway Russia* Venezuela
Primary resource diamonds hydrocarbons hydrocarbons hydrocarbons
Territory
thousand km2 582
(47th) 385
(61st) 17 098
(1st) 916
(32nd) Population
millions (2019)
2,25 (145th)
5,39 (118th)
143 (9th)
28,9 (45th) GDP per capita
US dollars (2019, PPP)
18 553 (71st)
70 006 (7th)
29 181 (50th)
17 527**
(75th) Natural wealth per capita
US dollars (2014)
26 140 (27th)
103 184 (6th)
46 921 (16th)
38 151 (19th) Resource rents
percentage of GDP (2014) 2,53
(80th) 7,83
(47th) 13,28
(31st) 10,36
(40th) Adjusted net savings
percentage of GNI (2014)
27,88 (7th)
21,78 (18th)
6,90 (98th)
7,20 (96th) Human Development Index
“new” method (2020)
0,74 (100th)
0,96 (1st)
0,82 (52nd)
0,71 (113th) Economic Complexity Index
Harvard’s Growth Lab (2018) –0,48
(84th) 0,44
(43rd) –0,04
(64th) –1,14
(119th)
Botswana, Norway, Russia, and Venezuela are all gifted with large deposits of technically appropriate natural resources and still, their advances in socioeconomic development are barely comparable. Table 18 provides an overview on the most important indicators to highlight the differences, while Figure 26 shows the dynamics of economic growth over the past 30 years. At glance, Norway is outstanding in most indicators as it controls over the largest natural wealth per capita, has the highest GDP, and ranks first among all countries in terms of human development. In contrast, Venezuela counts for the lowest GDP and HDI, while its economy is also the least diverse among the countries at hand. Between the two extremes, Botswana and Russia are included to resemble the transition in the form of a limited resource blessing and a mild version of the curse, respectively. Section 5.1 will demonstrate that Botswana was partially successful as it had escaped the low-income trap but failed to diversify away from the mining industry. On the other hand, Russia has developed a relatively diverse economy but keeps struggling with the consequences of a political resource curse. Therefore, I argue that there is a clear order to establish: First, Norway has escaped the resource curse and stands as a perfect example for the institutional reversal.
Second, Botswana has avoided the growth failures but shows the signs of an unbalanced development which raises
200 For the discussion, please see Chapter 6.
201 Compiled by the author. Data sources: https://data.worldbank.org, http://hdr.undp.org/en/content/human-development-index-hdi, https://atlas.cid.harvard.edu, and https://www.cia.gov/the-world-factbook/countries (territory and population). Global rankings are shown in parentheses (out of countries where data was available).
* Excluding Crimea.
** Data point is from 2014. The latest estimation by the International Monetary Fund is as low as $4 908 per capita in 2020.
serious concerns about sustainability. Third, Russia seems to be clogged into the middle-income trap with a political system that does not really provide any opportunities to escape. And finally, Venezuela represents the polypathological case of the resource curse in the form of a populist rentier state that already went through several growth collapses. Moreover, its current situation seems worse than ever before.
Figure 26: Comparison of growth dynamics202
A similar pattern is drawn by the growth statistics. Apart from the financial crisis of 2008–2009, Norway enjoyed a relatively stable growth throughout the whole period, while the rest experienced more volatility (see the figure above). Although the Tswana economy grew by 96%203 from 1990 to 2019, there were five years of recession as well as a significant positive overshoot after the financial crisis. Meanwhile, Russia started the period with almost 10 years of decline due to the collapse of the Eastern Bloc and the Soviet Union itself. However, most of the losses were recovered during the oil booms of the mid 2000’s and the country had reached its initial level of per capita income by 2006. Since then, they have avoided a similarly severe collapse, but the growth rates have never returned to the pre-crisis levels204. Last but not least, Venezuela clearly suffers from the volatility curse as its figures are closely attached to the dynamics of the global crude oil prices. Moreover, the most recent crisis is being so devastating that the World Bank does not even estimate its GDP growth rates since 2014.
Not surprisingly, the measures of institutional quality reflect the same order (see Figure 27). The Worldwide Governance Indicators cover data from a variety of sources organized into six standardized clusters to describe the broad dimensions of “the traditions and institutions by which authority in a country is exercised” (Kaufmann et al., 2011, p. 222). Ranging from –2,5 to 2,5, two of the clusters concern the process of electing, monitoring, and replacing the government, another two address its capacity to formulate and implement sound policies, while the last two measure the respect of citizens for the institutions that govern the interactions between them. Taken all the clusters, Norway averages at 1,77, Botswana at 0,59, Russia only reaches –0,58, while Venezuela is among the worst performers
202 Data source: https://data.worldbank.org/indicator/NY.GDP.PCAP.KD.ZG
203 Measured in constant 2017 dollars per capita (PPP). Source: https://data.worldbank.org/indicator/NY.GDP.PCAP.PP.KD
204 Please note that Russia is currently being under a partial western embargo due to the occupation of the Crimean Peninsula.
-15%
-10%
-5%
0%
5%
10%
15%
20%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Botswana Norway Russia Venezuela
globally with an average of –1,78. Moreover, the exact same order stands for each of the clusters separately, which leaves no doubt about the ranking: Norway has developed the best institutions, followed by Botswana and Russia, while Venezuela lags behind significantly, especially in terms of regulatory quality and the rule of law.
Figure 27: Dimensions of institutional quality205
The following sections will focus on the country-specific characteristics to reveal the fundamental differences and demonstrate the explanatory power of the theories discussed before. However, please note that the first and most important argument about the institutional condition is already supported by the comparison above. Namely, countries with good institutions such as Norway and Botswana could benefit from their natural abundance, whereas countries with poor institutions suffer from the resource curse.