Friday, September 12, 2008

Resource Curse Revisited and Revised

For those interested in the resource curse and economic freedom, check out "The Resource Curse Revisited and Revised: A Tale of Paradoxes and Red Herrings" by Christa N. Brunnschweiler and Erwin H. Bulte, in JEEM 55(3), but ungated version here. Abstract:
We critically evaluate the empirical basis for the so-called resource curse and find that, despite the topic's popularity in economics and political science research, this apparent paradox may be a red herring. The most commonly used measure of “resource abundance” can be more usefully interpreted as a proxy for “resource dependence”—endogenous to underlying structural factors. In multiple estimations that combine resource abundance and dependence, institutional, and constitutional variables, we find that (i) resource abundance, constitutions, and institutions determine resource dependence, (ii) resource dependence does not affect growth, and (iii) resource abundance positively affects growth and institutional quality.
My research does not include the resource curse, but I never bought the arguments pertaining to the resource curse (underdevelopment of other sectors, for one example) other than the public choice view of it, which to me this article confirms (though other interpretations welcome).

The resources themselves are innocent, it is that resources are often immobile (you cannot relocate your coal mine to another jurisdiction). Government power is derived from immobility, e.g. the bridge club cannot exploit you easily because you will just quit, but it is harder to quit a country. This is precisely the reason so many people argue the federal government should tax income instead of the states, because people can't escape it as easily.

Since resources are immobile, they are prime targets for government exploitation (and hence corruption and lack of economic freedom). However, the resource owners and their employees are wise to this and have a long term interest in ensuring that they infiltrate the powers of government and provide a competing incentive for the rules of the game to favor them (hence corruption and lack of economic freedom). The resulting power struggle between exploitation and favoritism leads to poorer institutions that deter growth.

Factoring out this power struggle and poor institutions, resource dependence and abundance should be innocent. I see no reason for resource dependence to matter and abundance should be positive for growth, once this institutional struggle is held constant.

I think that this paper should clarify the meaning of the "resource curse," but not eliminate it from our lexicon.


Matt E. Ryan said...

It still is worth look at, though, exactly because resources can cause the institutions to be worse. The AJR papers are the same way-- it was the extractive schemes based on already rich colonies that caused the reversal of fortune. You could view resources like a prosperous colony.

Anonymous said...

solar cells energy is not going to hear what the RVO
is until late summer.

Here is my site Maldi-Msi.Org