Resource Rents, Democracy & the Eight Policy Lessons

Abstract

We examine if resource revenues are likely to be managed more effectively with strong (or lack of) institutions and if so to contribute to economic development in resource abundant countries. We estimate a general model using evidence for the resource booms of the 1970-2012 period, resource rents, natural capital, socio-economic indicators and for institutions. Our results show 1) Countries with ample natural capital and subsoil wealth levels are associated to a healthier democracy which potentially mitigates the resource curse (RC); 2) High resource rents are negatively associated to weak institutional quality deepening the curse; 3) Long run economic growth is positively associated to natural capital but negatively associated for those countries that receive high resource rents. We recommend stronger transparency for revenue allocation, for sales of oil production, for the allocation of licences, and for revenue collection. One limitation is the lack of information: (energy) laws inducing economic growth. This paper contributes to explaining the long run impact of democratic change on managing resource revenue. Our three key conclusions are:1) Resource abundance across the world produces a strong income effect; 2) Institution quality emerges as the key mechanism from which the RC effect emanates; and 3)The RC effect does not appear in all countries at all times as some researchers argue.