Institutions and the Resource Curse

TLDR

Natural resource abundance can lead to either growth losses or gains. The study argues that institutional quality explains why resource-rich countries sometimes grow and sometimes fail. The authors test that resource abundance harms income under grabber‑friendly institutions but boosts it under producer‑friendly ones, extending Sachs and Warner’s framework. The results confirm that institutional quality determines the resource curse, contradicting Sachs and Warner’s claim that institutions are irrelevant.

Abstract

Countries rich in natural resources constitute both growth losers and growth winners. We claim that the main reason for these diverging experiences is differences in the quality of institutions. More natural resources push aggregate income down, when institutions are grabber friendly, while more resources raise income, when institutions are producer friendly. We test this theory building on Sachs and Warner's influential works on the resource curse. Our main hypothesis – that institutions are decisive for the resource curse – is confirmed. Our results contrast the claims of Sachs and Warner that institutions do not play a role.