Resource Rents, Political Institutions and Economic Growth*

Abstract

This paper contributes to the empirical literature on oil and other point-source resource curse. We find that the curse does exist but conditional on bad political governance. Unlike previous studies, we estimate a flexible econometric growth model that accounts for long-term country heterogeneity and cross-dependency and retains the virtues of the recent literature, including short-run flexibility, cointegration and error-correction mechanisms. We unpack political institutions into those reflecting the degree of inclusiveness (Polity) and credibility of intertemporal commitments (political check and balances) and find that resource-rich countries with low levels on both scores are likely to experience the curse, while those with high enough levels may turn resource rents into a driver of growth. Countries with high scores on only one dimension may avoid the curse but are not likely to effectively use resource rents to promote growth. This suggests that for the oil-rich Arab World to achieve sustained growth, not only democracy is a necessary condition but also the creation of a strong system of political checks and balances.

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