Does democracy cure a resource curse?

In this paper we utilise a large and reasonably detailed dataset to show that a greater level of democracy in a country’s political institutions can alleviate the widely known resource curse. Raw material abundance affects per capita growth negatively, an effect that seems to work through several different channels. Resource-abundant countries have a lower degree of democracy and political rights, and also a lower level of educational attainment. These factors inhibit growth. On the other hand, countries with large extractive industries exhibit high levels of investment. The effects of resource abundance differ for different raw material types, and the largest negative effect on growth appears to come from non-fuel extractive raw materials.

Introduction: There is a large body of literature showing that, as a rule, resource-rich developing countries have grown more slowly than countries less endowed with natural resources (Sachs and Warner, 1997; Gylfason and Zoega, 2001). A few countries blessed with abundant natural resources, however, have grown rapidly, even over the long run. Botswana, known for its diamond riches, is often cited as a developing-country success story. By 1989, dia-monds accounted for some 80% of Botswana’s exports, yet between 1970 and 2001 Bot-swana’s per capita GDP averaged 6.4% yearly growth. Among OECD countries, Norway’s large oil and natural gas wealth has not prevented it from growing quite rapidly. Given its high initial per capita income, Norway’s average annual growth rate of per capita GDP of 2.8% between 1970 and 2001 is also quite impressive. Apparently, a large resource en-dowment does not automatically condemn a country to sub-par growth performance.

Author: Iikka Korhonen

Source: Institute for Economies in Transition, Bank of Finland

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