Development outcomes, resource abundance, and the transmission through inequality

https://doi.org/10.1016/j.reseneeco.2013.04.007Get rights and content

Highlights

  • The relationship between resource abundance and human development is investigated.

  • The hypothesis is that (i) resource abundance increases inequality and (ii) higher inequality reduces human development.

  • The econometric analysis shows that transmission through inequality is significant.

  • Overall, the effect of resource abundance on human development is negative.

Abstract

The paper studies the effect of resource abundance on human development in light of two complementary hypotheses: (i) resource abundance increases the inequality of income distribution within a country and (ii) higher income inequality reduces human development. The estimation of a system of equations provides support to both hypotheses. In addition, results suggest that resource abundance might also affect human development by reducing the quality of institutions. However, while statistically significant, this effect is quantitatively small. Finally, there is evidence of a strong, negative direct effect of resource abundance on human development after controlling for inequality, institutional quality, and the level of per-capita income.

Introduction

The natural resource curse hypothesis originally formulated by Gelb (1988) and Auty (1993) has spurred a voluminous literature on the development effects of resource abundance. Consistently with the traditional view in policy circles, this literature has mainly focused on monetary aspects of development, such as the level and growth rate of per-capita income. In recent times, however, the interest of policymakers in non-monetary outcomes has increased, thus strengthening the need for a better understanding of how resource abundance affects “human” development. Against this background, the purpose of the paper is to investigate the following hypotheses: (i) the abundance of natural resources makes income distribution within a country more unequal and (ii) higher income inequality worsens human development outcomes for the average individual in a country. The estimation of a system of equations using cross-sectional data for the period 1970–2010 confirms that resource abundance negatively affects human development via its effect on income inequality.

Pioneering studies by Sachs and Warner, 1997, Sachs and Warner, 1999, Gylfason et al. (1999), and Gylfason (2001) document a statistically significant inverse relationship between the size of the resource sector and economic growth. Since then, the conventional wisdom is that natural resources are a curse. Several subsequent papers have tried to uncover the mechanism underlying this curse. Leite and Weidmann (1999), Ross (2001), Sala-i-Martin and Subramanian (2003), Isham et al. (2005), Mavrotas et al. (2006), Boschini et al. (2007), and Vicente (2010) show that the adverse effect of abundant resources on the quality of governance and policymaking is what causes slower growth. Sachs and Warner (2001), Papyrakis and Gerlagh (2004), and Gylfason (2008) provide evidence that the resource sector crowds-out other engines of economic growth. Harvey et al. (2010) suggest that the negative effect of natural resources on growth arises from the secular decline in the terms of trade suffered by resource dependent economies. Van der Ploeg and Poelhekke (2011) provide evidence that the main effect of resource abundance is to increase growth volatility, which in turn reduces the long-term average rate of growth. Finally, a number of papers (Collier and Hoeffler, 2005, Olsson, 2007, Blattman and Miguel, 2010, Janus, 2012) link resource abundance to increased likelihood of civil war and social unrest, which in turn hinder long term growth prospects.

The conventional wisdom however does not go unchallenged. Stijns (2005), Gylfason and Zoega (2006), Brunnschweiler (2008), Brunnschweiler and Bulte (2008), Alexeev and Conrad (2009) show that the evidence of a “resource curse” is not robust to changes in the specification of the econometric model and/or the empirical definition of resource abundance. A growing body of evidence also suggests that resources are not necessarily good or bad per se, but that their effect depends on factors like the strength of domestic institutions and quality of economic policy management (e.g. Mehlum et al., 2006, Snyder, 2006, Arezki and van der Ploeg, 2011), the degree of ethnic fragmentation in a country (Hodler, 2006), the effectiveness of checks and balances or the type of institutional arrangements (Andersen and Aslaksen, 2008, Collier and Hoeffler, 2009), and the quality of the disease environment (Carmignani and Chowdhury, 2012).

Within this broad research programme, there are only a handful of papers that specifically look at the impact of resource abundance on human development. Bulte et al. (2005) find that resource abundance indirectly affects measures of human welfare via its effect on the quality of institutions. After controlling for this indirect effect, they find no evidence of any direct effect. Costantini and Monni (2008) show that the adverse effect of resource abundance on human development is transmitted through both weaker institutions and reduced economic growth. In his discussion of crowding-out effects, Gylfason (2008) emphasizes the negative relationship between natural capital and social capital, thus implying that natural resources hinder social development. Finally, Carmignani and Avom (2010) provide evidence of a negative effect of primary commodity export dependence on social outcomes.

In line with previous contributions, this paper studies the human development impact of resource abundance while controlling for the effect of per-capita income on human development. This means that the analysis focuses on the direct effect of resource abundance on human development and the indirect effects transmitted through channels other than per-capita income. In particular, the paper considers a transmission channel that the literature has so far neglected: income inequality. In fact, the idea that resource abundance causes inequality is not new (see Leamer et al., 1999, Gylfason and Zoega, 2003). What is new is the investigation of how the inequality effect of resource abundance influences human development. In this regard, the paper argues and empirically demonstrates that even if natural resources had no effect on per-capita income (or growth), their adverse effect on income distribution would still result in a human development curse.1

The rest of the paper is organized as follows. Section 2 introduces the hypotheses on the role of resource abundance in the human development process. Section 3 presents the empirical approach, with specific attention to the measurement of resource abundance. Estimation results are discussed in Section 4 and Section 5 concludes. Appendix A contains a detailed description of variables and data sources.

Section snippets

Resource abundance, income distribution, and human development

The association between average per-capita income and indicators of human development is not perfect, but generally very strong. This suggests that one obvious way in which resource abundance can affect human development is through its effect on per-capita income. However, as discussed in the introduction, the relationship between resource abundance and per-capita income is rather controversial. At the same time, there is a considerable amount of literature, especially in the field of health

Empirical model and data

The empirical test of the two hypotheses put forward in the previous section involves the estimation of a system of equations. This in turn requires a number of methodological choices that are discussed in this section.

Baseline and extended system

Table 1 reports estimates of the baseline system of Eqs. (1), (2). In columns I and II the system is estimated by OLS applied equation-by-equation. All the coefficients have the expected sign and many pass the zero restriction test at the 5% or 1% confidence level. The two hypotheses formulated in Section 2 receive some significant support. In Eq. (1), resource abundance increases inequality. In Eq. (2), higher inequality reduces human development. Taken together, these two results indicate

Conclusion

This paper studies the effect of resource abundance on human development in light of two complementary hypotheses: (i) resource abundance increases the inequality of income distribution within a country and (ii) higher income inequality reduces human development. The estimation of a system of equations yields some significant support to these two hypotheses, thus confirming the existence of an “inequality channel” in the transmission of the effect of resource abundance on human development. In

Acknowledgements

Helpful comments from Chris Fleming, John Forster, the editor Daan van Soest, three anonymous referees, and participants in seminars at Griffith University and the University of Queensland are gratefully acknowledged. Hamish Clift provided excellent research assistance.

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