Research Conclusions

Concerns over the impact of resource wealth, and windfall gains in general, on the process of economic development have been at the heart of economic thinking for centuries. In that respect, sixteenth century philosopher Jean Bodin stated:

Men of a fat and fertile soil are most commonly effeminate and cowards; whereas contrariwise a barren country makes men temperate by necessity, and by consequence careful, vigilant and industrious (Bodin, 1962 [1576]).

A century later, Adam Smith commented in his influential manuscript “An Inquiry into the Nature and Causes of the Wealth of Nations”:

Projects of mining, instead of replacing the capital employed in them, together with the ordinary profits of stock, commonly absorb both capital and stock. They are the projects, therefore, to which of all others a prudent law-giver, who desired to increase the capital of his nation, would least chuse to give any extraordinary encouragement (Smith, 1976 [1776]).

The disappointing economic performance of many resource-affluent economies (such as the OPEC cartel countries) over the last three decades has revived interest in the impact of resource wealth on economic development. Overvalued currencies, underinvestment, low levels of human capital, and extensive corruption have accompanied resource rents in most cases. In this thesis we explored several aspects of the resource curse hypothesis, in order to elucidate the tendency of resource-dependent countries to underperform in terms of economic growth. We obtained both theoretical and empirical insights into this paradoxical relationship in order to derive both explanations and policy remedies of the phenomenon.

(i). Theory

During the last few decades there have been numerous attempts to deviate from neoclassical models of economic growth and allow for endogenous technological change. A key feature of such models is their adopted assumption that technological progress is not exogenously given to the economic system but endogenously determined by choices and actions within the system.

The research undertaken within Chapters 2 and 3 has been much inspired by recent developments in economic thinking on income growth and its endogenous character. In Chapter 2 we developed an OverLapping-Generations (OLG) model, to show how savings adjust downwards to income from natural resources. Our analysis provided a theoretical justification to the empirical observation that resource-dependent countries generally do not reinvest resource rents in other forms of capital. We believe that the mechanisms behind the failure of many resource-dependent countries to reinvest resource rents deserves particular attention. In our model, a continuous stream of resource wealth reduces the necessity to save and thus results in decreased levels of investment and manufactured output. A high responsiveness of labour productivity to capital accumulation enhances the negative impact of resource wealth on the steady-state levels of capital and man-made income per person. We showed that such knowledge spillovers matter a lot in terms of determining overall income levels. The contracting effect of natural resources on physical capital and manufactured output outweighed by far any positive direct impact of resource income in the case of strong knowledge spillovers. The existence of such knowledge spillovers is essential for the analysis, since the resource curse becomes an issue of concern only when such spillovers exist.

In Chapter 3 we developed a variation of the Ramsey-Cass-Koopmans model with endogenous growth features in order to provide insights into the impact of resource booms on innovation activities. In the literature, approaches attempting to explain the resource curse paradox through the impact of resource rents on labour productivity usually take technological progress as a side-effect (learning-by-doing) without inputs being devoted explicitly to R&D activities. Chapter 3 assumed on the contrary that innovation is the outcome of intentional actions rather than the by-product of other activities. The analysis is novel in that respect, since it attempted to elucidate how resource abundance may distort the incentives to engage in R&D activities. In our analysis, individuals trade off consumption and leisure in terms of utility and as a result an increase in resource wealth induces a reduction in the steady-state labour supply. This is a consequence of the fact that resource revenues allow agents to pay for extra consumption without additional work effort. Furthermore, we illustrated how resource rents induce a smaller proportion of the labour force to engage in innovation. Reducing work intensity and R&D participation are likely to constrain the growth capability of the economy.

(ii). Empirics

In Part III of the thesis we moved from theory to empirics in order to confirm the resource curse hypothesis and attribute it to several transmission mechanisms. The main purpose of the analysis was twofold. On the one hand, we verified the hypothesis and tested the contracting effects of resource rents on a number of growth determinants as suggested in the resource curse literature. Secondly, we confirmed that the theoretical mechanisms exposed in Part II of

the thesis explain a large part of the negative correlation between resource abundance and economic growth. In Chapter 4 we devoted our analysis to cross-country growth regressions for the 1975-1996 period and found resource rents to be negatively associated with institutional quality, investment, openness, terms of trade, and education. Additionally, we found that the negative indirect impact of resource affluence on growth disappears when we account for the aforementioned indirect channels. This implies that at a country level natural resources are not harmful to economic growth per se. Furthermore, an important contribution of our analysis lies in allowing the evaluation of the relative importance of each transmission channel in explaining the negative correlation between resources and growth. We found investment to be the most important intermediate mechanism through which the resource curse takes place across countries, accounting for almost half of the correlation. This confirms that the theoretical investment mechanism exposed in Chapter 4 can be particularly relevant in terms of elucidating the occurrence of resource curse phenomena.

In Chapter 5 we investigated whether “resource curse” phenomena are relevant at a regional level as well. We compiled a novel U.S. state-disaggregated database and conducted cross-state growth regressions in order to test the existence of a regional U.S. resource curse.

Confirming our hypothesis, we found evidence of a negative correlation between resource dependence and economic growth for the 1986-2000 period. Our empirical analysis confirmed that several crowding-out mechanisms identified in our cross-country analysis (such as investment and corruption) apply across regions. Furthermore, we found innovation to be a significant channel through which resource rents inhibit economic growth across states.

Innovation and education played the major role in explaining the resource curse across U.S.

states, giving substance to the theoretical mechanism exposed in Chapter 3. Our analysis is novel in two respects. Our approach challenged the absolute convergence hypothesis – often adopted in regional empirical analysis – that focuses on initial income levels as the sole determinant of growth rate variation across regions. We identified a number of growth-relevant variables including resource abundance to be significant determinants of economic growth, as found across sovereign countries. Secondly, to our knowledge this is the first empirical study of the resource curse at a regional level conducted in such an elaborate manner. In that respect, it was of particular interest to discover that intermediate mechanisms bear different relative importance across countries and regions.

In Chapter 6 we examine the impact of natural resources on income levels from a long-term historical perspective. Contrary to the negative impact of resource wealth on economic growth during the last few decades, as suggested by the resource curse hypothesis, we found mineral resources to be beneficial for institutional quality and thus indirectly on income levels in the far past. This suggests that the resource curse is a relatively recent phenomenon. Our analysis extends existing approaches on exogenous determinants of institutions and therefore indirectly of long-term income. Europeans settled in large numbers in some colonies and

established the investment-conducive institutional framework found in their countries of origin. Such institutions protected property rights and supported high levels of income. In other colonies where Europeans decided to settle in small numbers, they established local elites in order to regulate production and extract resources. It has been documented in the literature the extent to which the settlement decisions of colonisers were influenced by the urbanisation patterns and disease environment found in the newly-discovered regions.

Europeans preferred to immigrate to areas with a mild disease environment and scarce indigenous populations. We built on the same framework and revealed that regions rich in precious metals (gold and silver) became prominent settlement locations, attracting European colonisers and institutions. On the other hand, we found the production of a series of agricultural commodities reaching Europe at the time of colonisation (coffee, tea, cocoa, and sugar), to discourage European immigration, but nonetheless, to be positively correlated to institutional quality.