Growth, Development and Natural Resources: New Evidence Using a Heterogeneous Panel Analysis

Abstract

This paper explores whether natural resource abundance is a curse or a blessing. In order to do so, we firstly develop a theory consistent econometric model, in which we show that there is a long run relationship between real income, the investment rate, and the real value of oil production. Secondly, we investigate the long-run (level) effects of natural resource abundance on domestic output as well as the short-run (growth) effects. Thirdly, we make use of a non-stationary panel approach which explicitly estimates the long-run relationships from annual data as opposed to the dynamic and static panel approaches which might in fact estimate the high-frequency relationships. Fourthly, we account for cross-country dependencies that arise potentially from oil price shocks and other unobserved common factors, and allow countries to respond differently to these shocks. Finally, we explicitly recognize that there is a substantial heterogeneity in our sample, consisting of 53 oil exporting and importing countries with annual data between 1980-2006, and adopt the methodology developed by Pesaran (2006) for estimation. This approach considers different dynamics for each country and is consistent under both cross-sectional dependence and cross-country heterogeneity. We also check the robustness of these results by using the fully modified OLS method of Pedroni (2000). Our non-stationary approach also allows for country-specific unobserved factors, such as social and human capital, to be captured in the fixed effects and the heterogeneous trends together with any omitted factors. Our estimation results, using the real value of oil production, rent or reserves as a proxy for resource endowment, reveal that oil abundance has a positive effect on both long run income levels and short run economic growth. While we accept that oil rich countries could benefit more from their natural wealth by adopting growth and welfare enhancing policies and institutions, we challenge the common view that oil abundance affects economic growth negatively.

Keywords: Growth models, natural resource curse, cointegration, cross sectional dependence, common correlated effects, and oil

JEL Classification: C23, O13, O40, Q32