Natural Resources: Curse or Blessing?



20

theory of career concerns with endogenous entry of candidates, and regression discontinuity
design (Brollo et al., 2010). It finds that a municipal windfall of 10% increases corruption by
17-24 percent, raises the chances of the incumbent holding on to office by 7 percent, and
shrinks the fraction of its opponents holding a college degree by 7 percent. Such experimental
studies pave the way for more convincing evidence on natural resources and corruption.

3.6. Volatility of world resource prices harms exports and output growth

During the 1970’s when commodity prices were high, resource rich countries used them as
collateral for debt but during the 1980’s commodity prices fell significantly. Panel data
estimation suggests that this has thrown many resource rich countries into debt crises. Indeed,
if debt is also an explanatory variable in the panel data estimation, the effect of resource
dependence disappears. The empirical results suggest that the effect of resource dependence is
mainly driven by boom-bust cycles induced by volatile commodity prices, debt overhang and
credit constraints, and much less by quality of bureaucracy (data from Knack and Keefer,
1995) or degree of financial development (Mansano and Rigobon, 2001).

Changes in natural resource wealth are triggered by sudden changes in commodity
prices or resource discoveries, which can lead to boom and bust cycles. Resource revenues are
highly volatile (much more so than GDP), because their supply exhibits a low price elasticity.
Dutch disease can also induce real exchange rate volatility and thus to less investment in
physical capital and learning, further contraction of the traded sector and lower productivity
growth (Gylfason et al., 1999). Cross-country evidence suggests that real exchange rate
volatility can seriously harm the long-term productivity growth, especially in countries with
low levels of financial development (Aghion et al., 2009). For a monetary growth model it
can be shown that real exchange rate uncertainty can exacerbate the negative investment
effects of domestic credit market constraints.10 Empirically, IMF data on 44 commodities and
national commodity export shares and monthly indices on national commodity export prices
for 58 countries during 1980-2002 suggest that there is a long-run relationship between real
commodity prices and real exchange rates in about one-third of these commodity-exporting
countries (Cashin, et. al., 2004). However, many countries with abundant natural resources
are likely to experience volatile real exchange rates which might explain observed volatile
growth rates of growth that cannot be explained by the conventional, relatively stable
determinants such as institutions, geography and culture. Historical evidence for the period
1870-1939 indeed suggests that volatility harms growth for the commodity-dependent
‘periphery’ nations rather than for Europe or the US (Blattman et al., 2007). Resource rich

10 With endogenous growth, if firms face tight credit constraints, long-term investment is pro-cyclical,
amplifies aggregate volatility and lowers mean growth for a given total investment rate (Aghion, et. al.,
2005). Under complete financial markets investment is counter-cyclical and mitigates volatility.



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