This blog is written by Kamiar Mohaddes, Senior Lecturer and Fellow in Economics at Girton College, University of Cambridge, UK.
According to the resource curse paradox, abundance of oil (natural gas, minerals and other non-renewable resources) is believed to be an important determinant of economic failure. But is the poor performance of resource-rich countries, when compared to countries which are not endowed with oil, due to the abundance of oil in itself or is the curse instead due to price volatility in global oil markets and production volatility due to political factors (such as wars and sanctions)? More importantly, is there a role for institutions and the government (in particular fiscal policy) in offsetting some of the negative growth effects due to the curse?
What do we know about the curse?
Although the early literature showed the existence of a negative relationship between real GDP per capita growth and resource/oil abundance, more recent evidence is not so clear cut. Firstly, the early literature used cross-country analysis that fails to take account of dynamic heterogeneity and error cross-sectional dependence, and this could bias the results. Secondly, the early analysis ignores the effects of oil revenue volatility on growth, which turns out to be important.
Figure 1 shows that for major oil producers, there is a positive relationship between the volatility in oil revenue and GDP growth (measured by its standard deviation over the full sample), but a clear negative relationship between real GDP per capita growth and its volatility. This suggests that the excess volatility in oil prices and production is associated with higher volatility in GDP growth, which in turn has a negative effect on output growth. We shall see now whether these results continue to hold when we use more advanced econometric techniques.