Oil Curse, Economic Growth And Trade Openness
Oil Curse, Economic Growth andTrade OpennessJoaquin Vespignani, Mala Raghavan and Monoj Kumar MajumderGlobalization Institute Working Paper 370Research Departmenthttps://doi.org/10.24149/gwp370Working papers from the Federal Reserve Bank of Dallas are preliminary drafts circulated for professional comment.The views in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bankof Dallas or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.
Oil Curse, Economic Growth and Trade Openness*Joaquin Vespignani†, Mala Raghavan‡ and Monoj Kumar Majumder§October 2019AbstractAn important economic paradox that frequently arises in the economic literature is thatcountries with abundant natural resources are poor in terms of real gross domestic productper capita. This paradox, known as the “resource curse,” is contrary to the conventionalintuition that natural resources help to improve economic growth and prosperity. Usingpanel data for 95 countries, this study revisits the resource curse paradox in terms of oilresource abundance for the period 1980–2017. In addition, the study examines the role oftrade openness in influencing the relationship between oil abundance and economicgrowth. The study finds that trade openness is a possible avenue to reduce the resourcecurse. Trade openness allows countries to obtain competitive prices for their resources inthe international market and access advanced technologies to extract resources moreefficiently. Therefore, natural resource–rich economies can reduce the resource curse byopening themselves to international trade.Keywords: Oil rents, real GDP per capita, trade openness, dynamic panel data modelJEL Classification: E23, F13, Q43*The views in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank ofDallas or the Federal Reserve System.†Corresponding author: Joaquin Vespignani, Tasmanian School of Business and Economics, University of Tasmania,Australia, Joaquin.vespignani@utas.edu.au.‡Mala Raghavan, Tasmanian School of Business and Economics, University of Tasmania, Australia,mala.raghavan@utas.edu.au.§Monoj Kumar Majumder, Department of Agricultural Economics, Sher-e-Bangla Agricultural University, Bangladesh,monojkumar.majumder@utas.edu.au.
1. IntroductionThe conventional intuition is that natural resources help to increase a country’s economicgrowth. Contrary to this, the literature reports that countries rich in natural resources tend tohave lower real gross domestic product (GDP) per capita than resource-poor countries—aparadox known as the ‘resource curse’ [see, e.g., Auty (1993), Sachs and Warner (1995),Gylfason (2000) and Van der Ploeg (2011)]. 1 For example, oil-rich countries such asVenezuela, Nigeria and the Republic of the Congo are poor in terms of real GDP per capita,while resource-poor countries such as Singapore, South Korea and Hong Kong have very highreal GDP per capita. 2 The literature identifies several factors that explain this paradox such aspoor institutional quality, political rent-seeking, commodity price volatility and lack ofdiversification. However, several other factors remain unexplored. This study examines acountry’s trade openness as a channel that may influence the resource curse. 3 The idea thattrade openness increases economic growth is well known; however the role of trade opennessin reducing the resource curse is yet to be explored.Trade openness increases real GDP per capita in a resource-rich country in differentways. Our hypothesis is that increased trade helps to lessen the resource curse problem byreallocating resources more efficiently. It provides countries access to the international marketand higher prices for their products. This access to international prices increases the country’sincome and real GDP per capita. Trade openness also makes available opportunities to useadvanced technologies for more efficient extraction of natural resources. With the use of newtechnologies, natural resource–rich countries can produce intermediate and final goods fromprimary goods and earn more profits. Trade openness helps to modernise the full economy byThe term ‘resource curse’ was first coined by Auty (1993) to explain the negative relationship between resourcedependency and economic growth.2Note that this is not true for all countries. For example, oil-rich countries such as Norway, Saudi Arabia andQatar have high GDP per capita.3Trade openness is the sum of export and import of the goods and services measured as a percentage of GDP.12
improving other related sectors such as roads and transport systems (Pedersen 2000), financialsectors (Braun & Raddatz 2008) and bureaucratic systems (Dutt 2009). Overall, trade opennessplays a crucial role in converting natural resources into a blessing rather a curse. Figure 1 showsthe relationship between real GDP per capita and oil rent (% of GDP) for the period 1980–2017. 4Figure 1: Relation between real GDP per capita and oil rent (% of GDP)45000CANUSA40000KWTReal GDP per SIRN50000NGA010YDR2030IRQ4050Oil rent (% of GDP)Source: Author’s calculations based on World Bank (2019).Despite the positive impact of trade openness on economic growth and development, itwas not considered comprehensively when studying the resource curse, aside from a briefdiscussion in a few studies. 5 Arezki and Van der Ploeg (2011) investigate the role of trade andinstitutions in reducing the resource curse and find that the resource curse becomes weaker incountries with a high degree of trade openness. In their seminal study, Sachs and Warner (1995)also find that trade openness improves economic growth by reducing the resource curse.However, these studies are based on cross-section growth models where the average growthIn Figure 1, we use the average data of real GDP per capita and oil rent (% of GDP) for countries with high oilreserves.5Throughout this study, we use change in real GDP per capita and economic growth interchangeably.43
over recent decades is regressed on a measure of resource abundance and a selection of controlvariables.In this study, we use a panel data framework to investigate the impact of trade opennesson the resource curse. 6 To the best of our knowledge, this is the first study to explore therelationship between the resource curse and trade openness in a panel data framework (ratherthan cross-sectional long-term perspective). 7This study uses an unbalanced dynamic panel data model that covers 95 countries forthe period 1980–2017. Countries and periods are based on data availability from the WorldBank (WB) and International Monetary Fund (IMF). We use the data for the full sample period(1980–2017) and then split the sample period into two subsample periods: 1980–1994 [beforethe World Trade Organization (WTO)] and 1995–2017 (after the WTO). We assume that thecommencement of the WTO in 1995 contributed to significant increases in international tradeand that increased trade helps to lessen the resource curse by more efficiently reallocatingresources. Moreover, many countries reduced their trade tariffs under the WTO agreementswhich has helped to boost international trade during the last two decades. 8 For example, Chinaabolished non-tariff barriers and reduced tariffs in the manufacturing sector after it joined theWTO in 2001. This significantly increased the demand for metals such as copper, aluminium,and steel (Coates & Luu 2012). This increased demand probably had an exogenous impact onthe growth of other countries. For example, Andersen et al. (2014) empirically found thatPanel data usually gives researchers a large number of data points, increasing the degrees of freedom andreducing the collinearity among explanatory variables, thus improving the efficiency of econometric estimates(Hsiao 2014). Moreover, the combined panel data matrix set consists of a time series for each cross-sectionalmember in the data set and offer a variety of estimation methods (Asteriou & Hall 2015).7Few studies use panel data models to discuss the resource curse hypothesis. By using a panel data modelconsisting of 56 countries from 1972–2000, Mavrotas, Murshed and Torres (2011) found that point resourcedependence harms economic growth in developing countries. Similarly, Goderis (2008) found the existence ofresource curse by using panel data for 130 countries for the period 1963–2003.8The WTO is an intergovernmental organisation that deals with the regulation of trade in goods, services andintellectual property between participating countries by providing a framework for negotiating trade agreementsand a dispute resolution process. Subramanian and Wei (2007) argue that the WTO contributed to 120 per centmore trade in 2000, valued about US 8 trillion.64
China’s accession to the WTO contributed to improving the growth rate in sub-Saharan Africancountries.This study focuses on oil as a natural resource because it is a highly tradeablecommodity. As oil price is directly linked to the production process, it may have a significantimpact on inflation, employment and output (Guo & Kliesen 2005). Moreover, point-sourceresources such as oil are more prone to rent-seeking that leads to resource curse (Isham et al.2005; Boschini, Pettersson & Roine 2007). 9 In this study, we use oil rent (% of GDP) as ameasure of natural resource abundance. 10 Although our study finds the existence of theresource curse, trade openness significantly decreases the resource curse problem, especiallyafter the introduction of the WTO.This study contributes to the literature in the following ways. First, to the best of ourknowledge, no previous studies have examined trade openness as a transmission channel forreducing the resource curse by using dynamic panel data models. Second, using panel dataallows us to evaluate the effect of trade openness over time and, particularly, the impact of thedramatic changes that followed the commencement of the WTO. Finally, the time dimensionof the panel data allows us to include periods of important recent fluctuations such as the globalfinancial crisis and European sovereign debt crisis.The study proceeds as follows. Section 2 provides an overview of the resource curseliterature. Section 3 describes the conceptual framework of the importance of trade. The9A point-source resource is a resource concentrated in a single identifiable location (i.e., not diffused in wideareas).10Following Bjorvatn, Farzanegan and Schneider (2012); Arezki and Brückner (2011); Bhattacharyya and Hodler(2010); and Collier and Hoeffler (2005), we use oil rents (% of GDP) as a proxy of natural resource abundance.Rents are basically net profits from resource extraction, defined as the value of the product minus total cost ofproduction. Rents measure the value of natural resources for a country. More precisely, they provide a lessambiguous measure of resource dependence compared with those previously used such as primary commodityexports, oil exports and reserves. The rent data tells us the value of the resource in the open market relative to theproductivity of the economy, and, indirectly, the value of capturing them (De Soysa & Neumayer 2007). Forrobustness, we use the natural resource rent (% of GDP). We define ‘abundance’ as the resource contributing alarge share of a country’s GDP.5
methodology of this study is described in Section 4. Section 5 describes the data and descriptionof the variables and Section 6 presents the empirical results from panel data estimations.Section 7 provides our conclusions and directions for future studies.2. Overview of the resource curse literatureTo study the role of natural resources in economic growth, it is essential to investigate themechanisms that link endowments of natural resources to poor economic performance. In theliterature, various economic and political reasons have been discussed for the failure totransform natural resources into economic growth including the ‘Dutch disease’, political rentseeking and corruption, poor institutional quality, commodity price volatility and lack ofdiversification. We discuss these factors in detail in the following sections.2.1. The Dutch diseaseOne of the most common economic reasons suggested for the resource curse is popularlyknown as the Dutch disease. In most resource-rich countries, sectors other than resources arelikely to suffer from a real appreciation of the national currency due to natural resource earnings,in part, being absorbed by the domestic non-tradeable sectors [see, e.g., Corden and Neary(1982), Sachs and Warner (1995), Papyrakis and Gerlagh (2007) and Iimi (2007)]. 11 Thisresults in exports from the non-resources sectors (usually manufacturing) become moreexpensive relative to the world market, thus making those sectors less competitive.Consequently, total national income is reduced, ultimately causing economic growth to slow.This mechanism is known as the ‘spending effect’ (see Figure 2).Corden and Neary (1982) and Corden (1984) first developed the Dutch disease model. Iimi (2007) describedDutch disease as the most prominent channel of the resource curse. Sachs and Warner (1995) argued that theDutch disease is responsible for the slow economic growth of resource-rich African countries.116
Figure 2: The spending effect in the ‘Dutch disease’Natural resource revenueboomInflation and real exchangerate appreciationDecrease in world demandfor country’s non-resourceproducts.Increase in resource rentsPrice of manufacturingproducts increases makingthose products expensiverelative to world marketpriceProduction decline in othersectors those are unrelated tothe resources. Consequently,income and employmentdecrease.Source: Badeeb, Lean and Clark (2017).2.2. Political rent-seeking and corruptionAccording to Gylfason (2001), Lam and Wantchekon (2003), Hodler (2006) and Deacon andRode (2015), the powerful political elites of resource-rich countries can control revenues fromnatural resources. These elites tend to distribute the windfall revenues for the benefit of theirown existing business and personal networks, instead of investing them in the developmentsectors. This rent-seeking behaviour increases income inequality which hampers sustainableeconomic growth. Moreover, such revenue windfalls are considered to be one of the majorreasons for the increasing conflict between stakeholders such as taxpayers, politicians, localtribes and developers (Sala-i-Martin & Subramanian 2013). Such conflict discourages bothdomestic and international investment which also leads to lower economic growth.2.3. Poor institutional qualityAnother reason for the resource curse—and closely related to political rent-seeking—is poorinstitutional quality. According to Mehlum, Moene and Torvik (2006) and Mavrotas, Murshedand Torres (2011), a country’s institutional quality plays an important role in determiningwhether an abundance of natural resources is a blessing or a curse. It is argued that high levelsof growth in resource-rich countries are due to the way in which rents from natural resourcesare distributed through existing institutional arrangements. If institutional quality is good, agenerous endowment of natural resource is a blessing. Mehlum, Moene and Torvik (2006);7
Torvik (2009); and Sarmidi, Hook Law and Jafari (2014) argue that the adverse effect of naturalresource abundance on economic growth will be dissipated if institutional quality is improved.2.4. Commodity price volatilityCommodity price volatility is another important channel for the resource curse. According tothe Bellemare, Barrett and Just (2013); Dwyer, Gardner and Williams (2011); Tujula andWolswijk (2004); and Dehn (2000), commodity price volatility generates uncertainty in theeconomy, delays stability in the budget, undermines the predictability of economic planningand potentially contributes to lower economic growth. Moreover, Catão and Kapur (2004)argue that during volatile periods countries need more international borrowing to smoothconsumption. Moreover, countries in this situation can expect to face stringent constraints ontheir borrowing capacity since financial markets will not only be aware of the default risk thatvolatility itself generates but will also be mindful that aggregate consumption and realinvestment decrease in times of commodity price volatility. These dynamics will likely lead tolower economic growth. 122.5. Lack of diversificationAnother reason for the resource curse is the lack of economic diversification in countriesabundant in natural resources. The major share of export earrings in these countries is generatedfrom just one or a few resources. This leads to economic vulnerability from exogenous shocksand results in slow economic growth (De Ferranti et al. 2002). Moreover, the natural resourcesector is generally capital intensive and location specific (Masten & Crocker 1985).Consequently, natural resource development brings few positive externalities to forward andAccording to Başkaya, Hülagü and Küçük (2013); Salim and Rafiq (2011); and Guo and Kliesen (2005),consumer demand decreases due to the adoption of a precautionary savings mindset by consumers who are worriedand uncertain about future income and unemployment levels as they are fearful that these levels may be adverselyimpacted during a period of commodity price volatility. Consequently, real investment decreases during periodsof price volatility (Masih, Peters & De Mello 2011; Henriques & Sadorsky 2011; Guo & Kliesen 2005; Bredin &Fountas 2005).128
backward industries (Sachs & Warner 1995). Therefore, the learning-by-doing effect is notexpected to be powerful in these economies.There is considerable literature on the above-mentioned transmission channels that giverise to the resource curse, but scant discussion about the dynamics associated with tradeopenness. Therefore, this study, which investigates the role of trade openness using panel datamodels, brings a new dimension to the resource curse literature.3. Conceptual framework: Importance of trade in resource-rich countriesThe uneven geographical distribution of resource endowment between countries plays acritically important part in explaining the significance of trade openness. Most of the world’snatural resources are concentrated in a relatively small number of countries, while manycountries have limited or no natural resources. For example, about 90 per cent of the world’sproven oil reserves are in just 13 countries (BP 2017). 13 Consequently, international trade playsa significant role in reducing the disparity in natural resource endowment of countries byallowing resources to move from areas of excess supply to areas of excess demand. Moreover,due to the excessive fixed costs in extracting the resources, large-scale extraction is required toachieve economies of scale. Large-scale production is only beneficial if there is a large marketfor exports of that resource. Overall, international trade is associated with a more efficientallocation of natural resources that leads to an increase in social welfare (Cho & Diaz 2011).Another important feature of natural resources is the dominant position of this sector innational economies. Many of resource-rich countries tend to rely on a narrow range of exportproducts. Figure 3 shows the value of export product concentration index (PCI) of differentThe Middle East countries (Saudi Arabia, Iran, Iraq, Kuwait, Syria, United Arab Emirate, Qatar, Yemen andOman) contain about 48 per cent of the world’s total oil reserve, and Venezuela contains nearly 18 per cent as of2016. The distribution of other fuels is also concentrated in a very small number of countries. For example, 10countries possess 80 per cent of global natural gas reserves in 2016, and just nine countries have 90 per cent ofthe world’s coal reserves.139
countries
panel data for 95 countries, this study revisits the resource curse paradox in terms of oil resource abundance for the period 1980– 2017. In addition, the study examines the role of trade openness in influencing the relationship between oil abundance and economic growth. The study finds t
resource curse is overwhelmingly an oil curse.1 Before 1980 there was little evidence of a resource curse. In the de-veloping world, the oil states were just as likely as the non-oil states to have authoritarian governments and suffer from civil wars. today, the oil states are 50 percent more likely to be ruled by autocrats and moreFile Size: 369KB
“resource curse” or the “curse of natural resources”. This concept states that natural resource endowments, particularly oil, slow per capita GDP growth in a country. The primary regression used to support the curse shows that countries with higher endowments of natural resour
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Keywords: Oil Curse, Resource Curse, ‘Dutch Disease’, Ghana, Nigeria Introduction Resource curse is sometimes referred to as the ‘Dutch Disease’ and it is a term economists use to refer to a situation where a country has abundant resources, yet i
curse or the oil curse. The more recent literature, however, has questioned the existence of this curse, pointing out serious technical problems with the empirical work that claims to demonstrate its existence.2 One intuitive reason to doubt the existence
curse phenomenon in oil-abundant MENA countries, and, on the other hand, by investigating the role of governancein avoiding the resource curse and turning oil rents into a tool for economic diversification in 11 MENA oil
worldwide oil discoveries and extractions. First, we revisit the so-called curse of oil, which contends that oil rent hinders economic development. Exploiting cross-country variations in the timing of oil discoveries and the size of initial oil in place,
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