New Business & Management publication accepted in Resources Policy journal

Oil dependence, quality of political institutions and economic growth: A panel VAR approach

In the most recent publication, led by  Dr. Nikolaos Antonakakis⁠ (together with Dr. Juncal Cunado, Dr. George Filis⁠, and Dr. Fernando Perez de Gracia) and forthcoming in Resources Policy (an international journal devoted to minerals policy and economics, aimed at individuals in academia, government, and industry), the ‘resource curse hypothesis’ is revisited from a global perspective. Paying particular attention to the quality of political institutions, the results of this study suggest that the resource curse hypothesis is only present in developing and medium-high income countries that are characterized by weak political institutions.

 

Non-Executive Summary

The resource curse hypothesis, also known as the paradox of plenty, refers to the paradox that economies with abundant natural resources tend to experience lower economic growth compared to economies with scarce natural resources. Given than there are many theories and the evidence in favor of the resource curse hypothesis is by no means conclusive, we re-examine the resource curse hypothesis in an attempt to shed more light into that field. In particular, we adequately account for the role of social forces, (external) political and economic environments in shaping development outcomes in resource abundant countries; as while most resource abundant countries have performed poorly in developmental terms (i.e., the cases of Angola and Congo, rich in oil, or the group of OPEC countries) a few have done quite well (i.e., Norway). Moreover, by employing a dynamic approach, we fully address the issue of endogeneity and reverse causality among the variables of interest (i.e. Oil dependence, quality of political institutions and economic growth). Based on a database for 76 countries over the period 1980–2012 we find the following empirical regularities: (1) a positive relationship between resource dependence and economic growth is documented for the overall sample of 76 countries. Put differently, the resource curse hypothesis is not present in the above case. (2) However, controlling for the quality of political institutions, and more importantly the constraints to the executives, is important in rendering the resource curse hypothesis significant. Doing so, we find evidence of the resource curse hypothesis, mainly for developing economies and medium-high income countries. Specifically, when economies from the aforementioned groups are characterized by weak quality of political institutions, then oil dependence is not growth-enhancing. Overall, our analysis shows that the resource curse hypothesis is mainly driven by the quality of political institutions, but more importantly, the constraints imposed to the executives. This suggests that the natural resource hypothesis holds true for autocracies with limited constraints to the executive.

Abstract

This paper examines the resource curse hypothesis both within and between countries of different democratic footprint, based on a dynamic model that properly accounts for endogeneity issues. To achieve that, we apply a panel Vector Auto-Regressive (PVAR) approach along with panel impulse response functions to data on oil dependence variables, economic growth and several political institutional variables in 76 countries classified by different income groupings and level of development, over the period 1980–2012. Our results suggest that controlling for the quality of political institutions, and in particular the constraints to the executives, is important in rendering the resource curse hypothesis significant. Doing so, the resource curse hypothesis is documented mainly for developing economies and medium-high income countries. Specifically, when economies from the aforementioned groups are characterized by weak quality of political institutions, then oil dependence is not growth-enhancing.

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