Even after controlling for the threshold effect and several other variables familiar from empirical growth literature, Mehrara (2009) still had significant country-specific residuals in the regression model. He moved on by testing these residuals, which he called “autonomous” growth, against the World Bank’s composite index of institutional quality to reveal a decisive correlation (r = 0,83). This result strongly suggests that the variance not explained by the classic theories is to be attributed to the differences in institutional quality. Accordingly, institutional economics has quickly became the new focal point of the research on the resource curse.
Abdulahi et al. (2019), for example, recontextualized the threshold analysis to show that the most important factor conditioning the growth effects is institutional quality. By applying a multiple threshold model on a panel sample of 14 Sub-Saharan resource economies, they identified three different regimes in terms of the
156 For the details and data sources, please see Table 16.
Austria
Costa Rica Lebanon
Guyana
Oman
Thailand
Egypt
Vietnam 19
17 25 33 41 49 57 65 73 81 89 97 105 113 121 129 137
-110-100 -90 -80 -70 -60 -50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 80 90 100 110
Income rank (GDP per capita in 2017l, PPP)
Relative dependence
Relatively abundant Relatively dependent
Abundant subsample OLS Dependent subsample OLS
aforementioned composite index157. Under good institutions (IQ > –1,28), the relation of resource rents and economic growth is significant and positive, while in case of poor quality (IQ < –1,37), the adverse effects become dominant. Thus, countries with sufficiently high institutional quality are able to manage their natural capital efficiently and turn abundance into a blessing, whereas weak institutions lead to dependency and catalyze the resource curse. Corresponding results were reported by Damette & Seghir (2018) as they confirmed the existence of an intensity threshold similar to Mehrara’s158 and also explained the negative effects in highly dependent countries by the low levels of government effectiveness. Sarmidi et al. (2014) drew similar conclusions by suggesting that good quality institutions tend to neutralize the resource curse and prevent countries from developing an excess dependence on natural wealth. Notwithstanding the methodological differences, all the aforementioned studies concluded that the nonlinear nexus of natural resources and economic growth is largely explained by institutional parameters. Hence, abundance per se is less relevant and what really determines the development outcome is the interaction between the resource wealth and the institutional environment of its extraction.
However, this interaction turned out to be more complex due the significant role played by the physical properties of the resources. Section 1.1.3 already discussed that point-source reserves are more likely to ignite violent conflicts since they are easier to grab, hold, control, and defend than diffuse resources. Further research pointed towards the extension of this concept as different types of natural resources seemed to be coupled with different development outcomes. A new term, the technical appropriability of the resource was first introduced by Boschini et al. (2007) to describe the potential with which a given resource can affect economic growth. Apart from being geographically clustered, a natural resource is technically more appropriate if it is (i) more valuable, (ii) easier to extract, store, transport, or smuggle, (iii) needs less processing, and (iv) sold with lower transaction costs. Therefore, reserves of gemstones, precious metals, minerals, and hydrocarbons are generally more appropriate while agricultural resources such as land, forests, soil, or climate are less. Please note that all the threshold regressions cited earlier in this section are based on restricted samples of oil, gas, or mineral exporting economies, that is, countries which control over highly appropriate reserves. The growth impact, whether a curse or a blessing, is expected to be more pronounced under such circumstances.
According to Boschini et al. (2007), the potential of a technically appropriate reserve is conditioned by the institutional environment. As the extraction of these resources provides significantly higher rents than other economic activities, the efficiency of revenue management becomes crucial. Under poor institutions, appropriate resources are likely to catalyze crowding-out, rent seeking, corruption, and conflict, whereas under good institutions they drive employment, investments, infrastructural development, and economic growth. Thus, an institutional threshold appears to mark the line between the domains of the resource curse hypothesis and the big push theory, while the technical appropriability of the reserve regulates the amplitude of the growth impact. Therefore, the appropriability hypotheses explain both the conditional and the non-monotonic nature of the resource curse:
Institutional appropriability: “The effect of natural resources on economic development improves with institutional quality.” (Boschini et al., 2007, p. 599)
Technical appropriability: “The interaction of institutional quality and natural resources depends on the type of resources. More precisely, the more technically appropriable are a country’s resources, the more important is it to have good institutions.” (Boschini et al., 2007, p. 599)
The diversity of the resource-driven development outcomes now seems less mysterious: Success stories such as Norway or Botswana have turned their highly appropriate resources into a blessing by maintaining high quality institutions, while growth failures such as Venezuela or many Sub-Saharan countries have suffered from the resource
157 This index is based on the World Bank’s Worldwide Governance Indicators and ranges from –2,5 to 2,5 with higher values indicating better institutional quality. The composite is calculated as the average of six subcomponents: Voice & Accountability (VA), Political Stability and the Absence of Violence (PS), Government Effectiveness (GE), Regulatory Quality (RQ), Rule of Law (RL), and the Control of Corruption (CC). Available at: https://info.worldbank.org/governance/wgi/
158 According to this study, the threshold is at 837 US dollars per capita in oil exports.
curse as poor institutional quality made efficient extraction and revenue management impossible. Furthermore, the appropriability hypotheses also explain most of the empirical controversies related to a major body of studies that did not find any impact on growth (see Table 7). First, technically less appropriate resources159 might not have enough potential to induce statistically significant effects. Second, the institutional quality might fall into the “middle” regime where it is good enough to avoid the resource curse but still too poor to turn abundance into a blessing. And third, positive and negative effects might cancel out in studies where institutional quality was not properly controlled for.
The usual empirical method to test the appropriability hypotheses is to incorporate an interaction term into the growth regression that links up institutional quality with resource intensity. Boschini et al. (2007) estimated the coefficient of such a term on numerous samples covering resources that differ in their technical appropriability. In general, they found significant and positive growth effects from the interaction which were more pronounced in case of appropriate resources160. Conclusively, the resource curse is conditional since it is neutralized or even reversed as the institutional quality improves (Boschini et al., 2013), while the growth effects are non-monotonic due to the different potential of each type of natural resources. Using similar methodology, I was able to confirm the appropriability hypotheses on a sample of 27 resource-intensive economies (Szalai, 2011). However, instead of running the same model with different resource proxies, I had a variable for the technical appropriability directly integrated to the interaction term. For all countries, the most significant reserves were classified into five categories and assigned with an integer variable that takes the value of one for the least appropriate resources and five for the most potential stocks161. Then, an average technical appropriability was calculated for each country as an intensity- weighted average of its reserves. In the growth regression, the interaction term was implemented as the product of the export-scaled resource intensity, the average institutional quality measured by the World Bank’s indicator, and the average technical appropriability as described before. With this specification, I found the interaction to be significantly and positively related to economic growth. Compared with other models only including the resource variable or a simple interaction between institutions and intensity, the higher explanatory power of the extended configuration confirmed both the institutional reversal and the appropriability hypotheses.
All in all, the second wave of empirical research discussed in this chapter has provided important pieces of evidence that brought us significantly closer to the completion of the resource curse puzzle. Now it is clear that natural wealth is indeed a fundamental source of growth, but its impact is highly dependent on the technical and institutional appropriability. The growth effects are conditional and non-monotonic due to the interaction of the physical properties of the resource and the institutional environment of its extraction. Thus, abundance might be whether a curse or a blessing, depending on how countries manage their stocks. Under poor institutions, technically appropriate resources set on the curse and catalyze growth failures as described by the classic theories in Chapter 2, while if coupled with good institutions, they facilitate socioeconomic development according to the big push theory.
Besides presenting further empirical evidence, the next chapter focuses on the exact mechanisms through which institutional quality conditions the growth potential of natural wealth. On one hand, a better understanding of this interaction is essential for well-founded and more effective policy proposals, while on the other, it might also be the final step to complete the resource curse puzzle.
159 Numerous empirical studies used the share of primary output (or export) as a proxy for resource intensity. These measures mostly include agricultural and forestry products that are technically less appropriate.
160 More specifically, they used the following four proxies: Share of primaries in exports (sxp from Sachs & Warner (1997a), the broadest measure associated with the lowest technical appropriability), share of ores and metals in exports (OrMetExp), share of mineral production in GNP (MinProd), and the share of gold, silver, and diamond production in GDP (MidasProd, representing the most appropriate resources). The interaction term was positive and highly significant in case of the latter three and the coefficient was increasing with technical appropriability.
161 The categories from the most to the least appropriate: (5) precious metals and gemstones, (4) crude oil, (3) natural gas and metal ores, (2) coal and marble, (1) everything else. Please note that higher values represent more growth potential.
4 The political economy of the curse
A long and bumpy road has led to the recognition that socioeconomic progress in resource-driven economies is ultimately a question of how the political and business elite, or the whole society in a broad sense, manages the available reserves and distributes the revenues from it. Unfortunately, this problem tends to grow together with natural abundance as more gifted countries are less likely to enter into a “developmental” political state (Auty, 1997).
However, as demonstrated by the previous section, the importance of sound economic management appreciates significantly if resources are more abundant and/or technically more appropriate. Thus, the difference between a resource blessing and a curse depends on the successful implementation of proper policies, which in turn only seems possible after achieving a certain threshold in institutional quality.
Auty (2001) identified five necessary conditions for a sustained, rapid, and inclusive economic development: (i) relatively equitable access to land and primary education, (ii) effective markets and public accountability, (iii) an open trade policy, (iv) competitive diversification, and (v) a developmental political state that aims to raise long-term social welfare by pursuing coherent economic policies. He argues that these conditions are far less likely to be met by resource-rich countries due to four specific reasons. First, limited windfalls in resource poor countries lower the tolerance for rent extraction or its unfair redistribution, which favors for a more equal access to land and other natural assets. Second, a resource deficient environment places a premium on efficiency by promoting market discipline and investments into reproductible capital. Third, open trade policies are more frequent among resource poor countries since they are less prone to the Dutch disease and the volatility curse. And forth, Ricardian specialization and the Balassa-Samuelson effect render the diversification of abundant economies significantly harder. Therefore, in Auty's (2001, p. 845) words, “most resource rich countries engender a political state that is fractional or predatory and whose government distorts the economy in the pursuit of rents.” In contrast, resource poor countries are more likely to nurture developmental political states162 with superior institutional quality that favors for competitive industrialization and sustainable growth (Auty, 2004).
On the whole, political economy aims to resolve the resource curse puzzle by providing generalizable theories of policy failure. According to Ross (1999), these explanations fall into three main categories; cognitive, societal, and state-centered theories. Rooted in the works of Machiavelli and Montesquieu, cognitive approaches emphasize the potential of natural wealth to induce myopic behavior and risk-taking attitude among both private and public actors.
Societal explanations suggest that resource windfalls increase the political leverage of a narrow economic elite who are interested in maintaining the status quo, suppressing competition, and supporting protectionist trade policies.
Finally, the state-centered approach is a hybrid that blends cognitive, societal, and institutional arguments to explain how natural wealth undermines the state’s ability to promote economic growth. At glance, it suggests that external resource rents liberate the government from the need of domestic taxation and provide revenues to execute populist welfare policies or to suppress the political opposition. Consequently, the society loses both its interest in and ability to hold the political elite accountable, which gives rise to corruption, clientelism, and autocracy. Therefore, what Ross calls the rentier state is very similar to Auty’s concept of the predatory or fractional political state and will be further discussed in Section 4.2.1.
The common point in political economy is that resource revenues are understood as manna from heaven, a largely independent source of income that is free for grabbing. Just like in the classic approach, this manna alters the relative returns on economic activities by creating perverse incentives. However, political economy extends this concept in terms of governance and policy making as it argues that the returns on political activities are being altered as well. This problem was summarized very profoundly by Kolstad & Wiig (2009b): “It’s the rents, stupid!” In accordance, they only distinguish between two main categories of political economy explanations: Centralized
162 This does not necessarily mean a democracy. Please see Sections 4.2.2 and 4.2.3 for a detailed overview on the effects of resource abundance on political regimes.
models focus on the decisions of the political elite, while decentralized models analyze the incentives of private actors. In this context, the aim is to understand how rents and institutions affect decision-making both on the micro- and macro levels. This thesis adopts a similar approach since decentralized models will be discussed as the microeconomic foundations of the resource curse, while centralized models are to be addressed through the concept of the rentier state. The goal of the following sections is to point out the stubbornness of the problem:
Although natural wealth may be turned into a blessing, the heavenly manna actually provides both micro- and macro level incentives that act to the contrary. Therefore, most internal reform initiatives and the implementation of efficient development policies are very likely to fail.