The Natural Resource Cure Quality of Institutions?
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DEPARTMENT OF ECONOMICS Uppsala University C-level Thesis Author: Anna Wiström1 Supervisor: Niklas Bengtsson Spring 2013 The Natural Resource Cure Quality of institutions? Abstract This study explores the natural resource curse and its possible cure via good institutional quality. In theory countries that are resource abundant are said to have slower economic growth than countries that are resource scarce. Earlier studies have shown that resource abundant countries only suffer from the resource curse if the resources are highly appropriable and if the institutional quality is low. If resource abundant countries instead have resources that are highly appropriable and if the institutional quality is high they will benefit from their resources. If a country has resource with low technical appropriability no negative effect on growth is expected. In this study several time periods are studied and it can be concluded that for earlier time periods the resource curse theory in general holds but for later time periods no negative effects of resource abundance on economic growth can be detected. Keywords: Natural resource curse, economic growth, development, appropriability, institutional quality JEL classification: N50, O13, O40, O57, P17 1 E-mail: [email protected] Table of Content 1 INTRODUCTION ......................................................................................................... 3 2 PREVIOUS RESEARCH ............................................................................................... 4 3 THEORY AND DATA ................................................................................................... 6 3.1 THEORY ............................................................................................................ 7 3.2 DATA ................................................................................................................ 9 4 RESULTS ............................................................................................................... 12 4.1 MAIN RESULTS ................................................................................................ 12 4.2 INSTRUMENTING FOR INSTITUTIONAL QUALITY .................................................... 16 4.3 WHY IS THERE NO RESOURCE CURSE BETWEEN 1990 AND 2010? ....................... 17 5 ROBUSTNESS ......................................................................................................... 20 5.1 EXCLUDING OUTLIERS ...................................................................................... 20 5.2 EXCLUDING OR INCLUDING VARIABLES ............................................................... 21 5.3 EXCLUDING REGIONS ....................................................................................... 21 5.4 EXCLUDING RICH OR POOR COUNTRIES ............................................................. 22 6 DISCUSSION ........................................................................................................... 22 7 CONCLUSION ......................................................................................................... 24 REFERENCES ............................................................................................................ 26 APPENDIX ................................................................................................................. 28 2 1 Introduction Why have Chile and Liberia had such different rates of economic growth for the last 30 years? And Singapore and Iran? Chile had a growth rate of 3.2 % per year and Liberia -3.2 % per year between 1980 and 2010.2 Singapore grew at a rate of 4.6 % per year and Iran -1.2 % per year between 1970 and 2000. One thing these four countries have in common is that they are abundant in fuel, ores or metals.3 About 64 % of Chiles and Liberia’s merchandise exports were ores and metals in 1980 and about 25 % of Singapore’s and 90 % of Iran’s merchandise exports were fuels in 1970. What makes these countries experience such different rates of economic growth? One thing that is different between the countries is the institutional quality. The quality of the institutions, governments and legal systems are in Chile and Singapore higher than in Liberia and Iran, making it possible for the two first countries mentioned to benefit from their resources while the two last cannot. To measure institutional quality in this study the International Country Risk Guide (ICRG) index is used. The ICRG index is combined of three components scaled to an o-1 variable where values close to 1 indicate good institutions and values close to 0 indicate bad institutions. The components included in the measure are quality of the bureaucracy, corruption in government and rule of law. The values for the countries mentioned above are 0.57 for Chile, 0.17 for Liberia, 0.89 for Singapore and 0.35 for Iran. In the previous examples the resources in question had a high level of technical appropriability. What happens with a country’s growth if the resources have a low level of technical appropriability? In both Panama and Paraguay food export was about 70 % of merchandise exports and the ICRG values were 0.22 and 0.14 respectively in 1970. Still both countries grew at a rate of 2.3 % and 2.6 % per year between 1970 and 1990. Less appropriable resources do not always imply a resource curse even if the institutional quality in a country is low. 2 For sources and descriptions of all data and variables used in the study see Table 14 in Appendix. 3 The level of resource abundance will in this study be approximated by exports as share of merchandise exports. 3 The examples above demonstrate three aspects of the theory to be explored in this study. Firstly, the phenomenon that resource abundant countries have slower economic growth than resource scarce countries, known as the natural resource curse. Secondly, the resource curse can only be detected if the resources have high technical appropriability, for example fuel, ores and metals, and not if the resources have low technical appropriability, like food and agricultural products. Thirdly, if a country is abundant in highly appropriable resources it will only be cursed if the institutions in the country have low quality. The theory of the resource curse with these aspects has been explored in earlier research from for example Boschini et al (2007 and 2013) and Isham et al (2005). In this study different resources with different levels of appropriability will be explored to see if a natural resource curse can be found and if it can be reversed, as it has been in Chile and Singapore, by good institutional quality. Thus the main questions to be answered can be stated as: do resource abundant countries, depending on the level of appropriability of the resources, suffer from slower economic growth than resource scarce countries? If they do, can the curse be reversed via good institutions quality? This study will with some alterations follow that of Boschini et al (2007 and 2013). The two studies will be explained in more detail and the differences between this study and those of Boschini et al (2007 and 2013) will be stated in the following parts of the text. The remaining part of this paper is divided into the following sections: section two covers earlier research, section three explains the theory and data to be used, section four will present the main results, section five checks the robustness of the results, section six discuses the results and future questions to be answered and section seven concludes. 2 Previous research Some of the most cited works in the natural resource curse field are by Sachs and Warner (1995, 1999 and 2001). Using primary exports as a proxy for natural resources they found a negative relationship between exports and growth between 1970 and 1989. They did not however find that institutional quality could reverse the 4 curse. They explained the negative relationship with what is known as the Dutch Disease. The basic idea behind the Dutch Disease is that countries that gain a lot of rents from natural resources will have a crowding-out effect in other economic sectors. Sachs and Warner (1995) argued that positive externalities, for example learning-by-doing, are only present in the manufacturing sector and thus countries with a large natural resource sector and small manufacturing sector will not benefit from these positive externalities. This theory does not explain why Chile and Singapore can have such high growth rates even if they are natural resource exporters. More resent research has been trying to deal with the problem that the outcome of natural resource abundance is ambiguous. Isham et al (2005) for example found, in contrast with Sachs and Warner (1995, 1999 and 2001), that institutional quality do play a role in determining if a country will be cursed or not. They also found that it is only what they call point source resources, like fuel, ores, metals and plantation crops, that lead to the resource curse and not diffuse resources, like food and agricultural products. Mehlum et al (2006) found in line with Isham et al (2005) that a country will be cursed if the institutions are grabber friendly but not if the institutions are producer friendly. Given that a country is abundant in point source resources it will only be cursed if the institutions are grabber friendly, undermining the production sector in the economy that lead to long term growth. When instrumenting for institutional quality they found that natural resources only effect economic growth