Natural resource rents and institutional change

Abstract

Recent literature argues that nations with abundant natural resources - primarily oil and minerals - tend to grow more slowly comparatively to resource-poor nations. Much of this cross-national variation in economic performance may be explained by the interaction between natural resources and institutional quality. Focusing on the importance of economic institutions in the form of property rights and the rule of law this paper presents an alternative explanation for the diverging economic paths in resource rich nations. Economic rents generated from abundant oil and gas resources may affect institutions or institutional quality. Further, that impact on institutions is itself contingent upon the quality of such institutions during the payoff period of the resource windfalls. The findings suggest that resource wealth has a positive influence on the strength of property rights and the rule of law (and thus, by inference on economic growth) in the nations that start out with strong protection of property rights and associated rule of law, but a negative influence in nations that do not. The results appear robust to alternative specifications of the resource variable.