Resource Intensity, Institutions, and Development

World Development Vol. 33, No. 7, pp. 1029–1044, 2005 Ó 2005 Elsevier Ltd. All rights reserved Printed in Great Britain www.elsevier.com/locate/worlddev 0305-750X/$ - see front matter doi:10.1016/j.worlddev.2005.04.004 Resource Intensity, Institutions, and Development ERWIN H. BULTE Tilburg University, Netherlands RICHARD DAMANIA University of Adelaide, Australia and ROBERT T. DEACON * University of California, Santa Barbara, USA Summary. — We examine the relationship between resource abundance and several indicators of human welfare. Consistent with the existing literature on the relationship between resource abundance and economic growth we find that, given an initial income level, resource-intensive countries tend to suffer lower levels of human development. While we find only weak support for a direct link between resources and welfare, there is an indirect link that operates through institutional quality. There are also significant differences in the effects that resources have on different measures of institutional quality. These results imply that the ‘‘resource curse’’ is a more encompassing phenomenon than previously considered, and that key differences exist between the effects of different resource types on various aspects of governance and human welfare. Ó 2005 Elsevier Ltd. All rights reserved. Key words — resource curse, human development, resource wealth and scarcity 1. INTRODUCTION Economic growth per se is a poor indicator of welfare. It is conceivable that even if natural re- Conventional economic reasoning suggests sources are a curse for economic growth nar- that increasing a country’s stock of assets pro- rowly defined, they may lead to improvements vides greater opportunities for economic in other aspects of welfare—such as the preva- growth. Somewhat paradoxically, a substantial lence of poverty, malnutrition, and infant mor- body of empirical evidence demonstrates that tality. It is an open question to what extent natural resources tend to hinder, rather than growth dividends, if any, percolate to other promote economic growth. The seminal and perhaps more vulnerable members of society. influential studies of Sachs and Warner (1997, 2001) show that after controlling for a wide variety of variables, an increase of one standard deviation in natural resource intensity leads to a reduction of about 1% per year in economic growth. This result has been coined the ‘‘re- * We are grateful to three anonymous reviewers for source curse,’’ and it inspired a large volume helpful comments and suggestions. Research support of subsequent empirical research. While the re- from the Agricultural and Development Economics sults are robust with respect to the inclusion of Division (ESA) at the United Nations Food and Agri- many conditional variables, they have also been cultural Organization is gratefully acknowledged. The challenged (e.g., by Manzano & Rigobon, 2001, views expressed in this report are those of the authors who focus on debt overhang, and Stijns, 2002, and do not represent the position of FAO. Final revision who emphasizes learning processes). accepted: January 21, 2005. 1029 1030 WORLD DEVELOPMENT The record of growth in recent decades shows 2. THE RESOURCE CURSE AND that many countries with low per capita growth ITS IMPLICATIONS rates have succeeded in providing food security and meeting basic nutritional needs, while oth- Why might resource-rich countries grow ers with higher growth rates have failed (Tho- slower than resource-poor ones? In the 1950s, mas, Daclam, Dhareshwar, Kaufman, & several ‘‘structuralist’’ explanations were devel- Lopez, 2000). The link between resource abun- oped, focusing on declining terms of trade for dance and underdevelopment is therefore un- primary commodities (e.g., Prebisch, 1950), known, a priori. sharp fluctuations in the prices of such com- The main objective of this paper is to ana- modities, or lack of linkages between resource lyze whether the negative statistical relation- extraction enclaves and the rest of the economy ship between natural resource abundance and (Hirschman, 1958). None of these explanations economic growth has a parallel in measures have stood the test of closer empirical scrutiny of economic underdevelopment and welfare. (e.g., Behrman, 1987; Cuddington, 1992; Dawe, While underdevelopment and welfare clearly 1996; Fosu, 1996; Lutz, 1994; Moran, 1983; are not independent of economic growth, there Tan, 1983). are important differences between these vari- In more recent times, economists and politi- ables. Underdevelopment and welfare indica- cal scientists have advanced new theories to ex- tors are typically expressed as ‘‘levels,’’ plain the disappointing growth performance of whereas economic growth is measured as a resource-rich countries, and these theories ap- change in levels over time. 1 Levels capture pear to be converging. In this section, we briefly differences in economic performance over long review the main economic explanations for the time periods, and are directly relevant for wel- resource curse: Dutch disease models, rent seek- fare as measured by the consumption of goods ing models, and institutional explanations. 2 and services (Hall & Jones, 1999). Empirical One class of hypotheses, of which the Dutch work by Easterly, Kremer, Pritchett, and Sum- disease is most famous, postulates that a re- mers (1993) reports relatively low correlation source boom will divert a country’s resources of growth rates across decades, suggesting that away from activities that are more conducive differences in growth rates across countries to long run growth. A resource boom causes may be transitory and that a focus on ‘‘levels’’ a country’s exchange rate to appreciate, which may be appropriate. Moreover, underdevelop- in turn induces a contraction in its manufactur- ment and welfare indicators capture distribu- ing exports, or draws capital and labor away tional considerations that are not captured from manufacturing, raising manufacturing by aggregate growth statistics. For example, costs as a result (Neary & van Wijnbergen, some indicators capture the population share 1986). But this in itself need not induce lower for which the so-called basic human needs growth rates, since growth in the resource sec- are met. This information complements in- tor could more than offset stagnation in manu- come growth statistics to provide a more com- facturing. To explain why resource booms may plete picture of the effect of resources on well generate lower growth, it is often assumed that being in society (also see Acemoglu, Johnson, the manufacturing sector is the main ‘‘engine of & Robinson, 2001b, and in particular Davis, growth,’’ because it either generates positive 1995, who compares indicators of develop- externalities or is subject to increasing returns ment for mineral and nonmineral exporters, to scale at the level of the sector (Matsuyama, finding no evidence that mineral exporters per- 1992; Sachs & Warner, 1999; Torvik, 2001). 3 form worse). There is little empirical support for the Dutch The paper is organized as follows. In Section disease as an explanation for the resource curse. 2, we review the theoretical and empirical liter- Perhaps this comes as no surprise. An overview ature on the relationship between resource of different case studies in Auty (2001a) demon- abundance and economic growth. Building on strates how complex and diverse the experi- this literature, we develop an empirical model ences of different resource-rich countries are. to analyze the impact of resources on underde- There are many exceptions to the resource velopment and welfare. This model is outlined curse both in the developed and developing in Section 3. In Section 4, we present the world—countries that have used their resources empirical results and discuss the main implica- to build modern and successful economies. In tions for development policies. Section 5 con- recent statistical analyses, terms of trade effects cludes. typically do not appear as significant determi- RESOURCE INTENSITY, INSTITUTIONS, AND DEVELOPMENT 1031 nants of growth rates either (Leite & Weid- geoning nontradable sector made up of infant mann, 2002; Sala-I-Martin & Subramanian, industries and an inflated but unproductive 2003). public sector. The second category of explanations revolves There is now ample empirical support for the around the potentially destructive role of rent key role that political and institutional vari- seeking in resource-rich countries. Rent-seeking ables play in economic growth. Leite and Weid- models are built on the assumption that re- mann (2002, hereafter LW) were among the source rents are easily appropriable, which in first to show that resource abundance is a turn leads to bribes, distortions in public poli- major factor shaping the institutional context. cies, and a diversion of labor away from pro- LW demonstrated that there is no direct effect ductive activities and toward seeking public of resource wealth on economic performance, favors (Torvik, 2002). The available evidence but there is an important indirect effect: re- suggests that resources are a curse to develop- sources affect the level of corruption, which in ment only for some countries and not for oth- turn determines growth. In other words, re- ers, however, so the basic rent-seeking source abundance could help shape the ‘‘social explanation is too blunt. There have been at- infrastructure,’’ the importance of which has tempts to enrich rent-seeking models with mul- been demonstrated by Hall and Jones (1999). tiple

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