Natural resources and economic growth: the research evidence

Can large reserves of oil, coal, diamonds, uranium or other natural resources be translated into national prosperity? This column provides an overview of the evidence from more than 40 studies. One common theme is that the better a country’s national institutions – including stronger rule of law, limited corruption and effective government – the more the economy will benefit from its natural resources. But more needs to be understood about the effect of discoveries of natural resources on inequality.

Numerous researchers with an interest in development studies have asked whether natural resources are beneficial for long-term economic growth. Yet despite nearly three decades of intensive empirical research, no consensus has emerged.

Observing this lack of consensus, we ask the following:

  • What is the typical effect of natural resources on economic growth?
  • Why do the reported results differ so much?
  • Are there any policy-relevant factors that have systematic importance with regard to how natural resources affect economic development?

We look at a large set of empirical studies of the natural resources-economic growth nexus using regression analysis. The results show a contradictory picture: roughly 40% of empirical papers find a negative effect (what is typically called the ‘natural resource curse’); 40% find no effect; and 20% find a positive effect of natural resources on economic growth.

We aim to summarize what we know about the quantitative effect of natural resources on economic growth based on previous empirical evidence, and provide guidance for other researchers. A somewhat tacit ambition of our research is to provide policy implications on how to manage natural resources so that societies benefit from them.

We collect 43 econometric studies, which report 605 regression estimates of the effect of natural resources on economic growth. Our definition of natural resources is point-source non-renewable resources – those extracted from a narrow geographical or economic base, such as oil, diamonds or metals.

We describe a long list of characteristics of these studies (all available in Havranek et al. 2016). For example, which explanatory variables are included in the models examining the effect of resources on growth? More specifically, do the empirical studies control for the country’s institutional quality (such as the World Bank’s measures of rule of law) and its potentially non-linear effect on economic growth via natural resources?

We also ask: What are the econometric methods employed? Do the studies address endogeneity issues? Are the studies published in prestigious peer-reviewed journals with many citations? Which measure of natural resources do the studies employ: measures of so-called natural resource abundance or dependence?

In our meta-analysis, we regress the previously reported estimates of the effect of natural resources on economic growth on the characteristics of data, estimation methods, and other aspects reflecting the context in which the estimates were produced.

Our research suggests only very weak support for the idea of the natural resource curse, once publication bias and method heterogeneity are taken into account. Therefore, the pessimistic prediction of some important studies in this field – that the natural resource curse is inevitable – is not warranted when all empirical evidence is considered.

Our statistical investigation of publication selection suggests that most researchers do not present results in a systematically biased manner – for example, publishing mostly negative estimates that support the notion of the natural resource curse while hiding more positive results in a ‘file drawer’. Such publication selection bias, resulting from the preference for intuitive or statistically significant results, has previously been shown to plague many fields of empirical economics.

We show that several factors systematically account for the heterogeneity in the results from studies of the effect of natural resources on economic growth:

  • Controlling for institutional quality.
  • Controlling for the level of investment activity.
  • Differentiating between resource dependence and abundance – that is, differentiating between flows and stocks of natural resources.
  • Distinguishing between different types of natural resources – in particular, oil seems to bring more benefits than other natural resources.

Especially important is the effect of institutional quality: Countries with better institutions tend to benefit much more from having a wealth of natural resources.

What should be the next steps? In our view, we know little about the effect that natural resources discoveries can have on inequality of income and wealth. In addition, more appropriate identification of the precise effect of natural resources on economic growth is vital (for example, using micro-level evidence or synthetic control methods). 

 

Authors:

Tomas Havranek is Advisor to the Board at the Czech National Bank and Associate Professor at Charles University, Prague. His research interests include international trade, macroeconomics, monetary policy, energy economics, and methodology of research synthesis.

Roman Horvath is a professor at Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague.  He served as the Head of Research Unit and Advisor to the Board at the Czech National Bank and as the President of Czech Economic Society.