Development Based on Commodity Revenues

Abstract

Commodity resources offer vast opportunities for development. In the long run, however, the performance of commodity-rich countries tends to fall short of expectations, as commodity rents induce macroeconomic volatility and undermine incentives to improve institutions. The paper looks at the strategies that countries can adopt to avoid the “resource trap.” These strategies aim at diversifying the economy, promoting financial development, building up stabilisation buffers that lower macroeconomic volatility, and reducing inequality. The resource-rich EBRD countries of operations have embraced these strategies to varying degrees, and with varying success. Improving institutions remains the key challenge.

Keywords: natural resources, economic boom, institutions, financial development

JEL Classification: Q32, Q33, O10, O16