Last Updated 07 Jul 2021

Natural Resources and Economic Growth

Words 1538 (6 pages)

The research of the impact of natural resources on economic growth is relevant because everyone who not only economists and financiers care problems of the economy through society anyway in their daily life. This research is controversial because while some believe that many countries without natural resources could develop their economy, others believe that natural resource is the most important part of the development of the economy.

Consequently, there are a lot of data, studies and books about natural resource and economy. "Five research articles"1 are used for this study paper so that save time and understand points exactly. These articles are searched from "internet source"2 filtering by citation and up to date information and authors with appropriate credentials for the subject matter.

During the collecting process, where was a challenge that some of the most cited articles were published many years ago and not full publication. However, there was enough information which were possible for the study.

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Natural resources are resources that exist without actions of humankind. This includes all valued characteristics such as magnetic, gravitational, electrical properties and forces etc. On earth it includes: sunlight, atmosphere, water, land (includes all minerals) along with all vegetation, crops and animal life that naturally subsists upon or within the heretofore identified characteristics and substances.
Natural resources may be further classified in different ways. Natural resources are materials and components that can be found within the environment. Every man-made product is composed of natural resources.

There is much debate worldwide over natural resource allocations, this is particularly true during periods of increasing scarcity and shortages (depletion and overconsumption of resources) but also because the exportation of natural resources is the basis. Consequently, I chose this topic. The following articles were not enough for my research fo far I have read five articles, further, I will read a book and from three to four articles. I will use all of these ideas and researches and results for my paper.

The aim of this paper is to assess, theoretically and empirically, the relevance of several forms of capital on economic growth in certain small economies that are dependent upon tourism or natural resources. The main goal of this study is to critically analyse the similarities and differences between the relevance of human capital and natural capital in small economies that are affected by the "natural resource curse" in comparison to countries that are dependent upon tourism as a source of revenue.

Primarily, natural capital seems to produce negative impulses in the majority of resource-dependent economies, especially those that are dependent upon resources that are easily substituted or have prices that are highly prone to influence from external shock. When observing similarities and differences between the resource-dependent and tourism-dependent countries, we find that natural capital does not significantly negatively influence economic growth in the tourism-dependent economies.

The only exceptions that we found were countries that either had a highly diverse economy or had resources whose price was relatively stable in the international market and thus less prone to shock. The main policy recommendation based on the results of our empirical analysis is that countries should attempt to diversify their economy by focusing on more than one key determinant of economic growth.

Focusing on only one key segment of the economy a strategy that involves a significant amount of risk, especially the volatility of the products in the international market and possible shocks that these small economies cannot predict nor can they in any way compensate for the occurrence of such shocks. Thus, as our empirical research suggests, developing a more diverse economy signifcantly reduces the potential risks of foreign shock, which is highly important for the economies that we have observed.

In this paper we authors stock of two decades of empirical research examining the existence of the natural resource curse.
Their results also suggest that three aspects of study design are especially effective in explaining the differences in results across studies:

  1. including an interaction between natural resources and institutional quality,
  2. controlling for the level of investment activity, and
  3. distinguishing between different types of natural resources.

According to authors suggestion that, taken together, the previous empirical studies on the topic imply a negligible effect of natural resources on economic growth on average. Our findings also provide certain support to the literature demonstrating that natural resources tend to crowd out investment activity.

They found that it matters for the results whether primary studies control for the investment level, include an interaction term between institutional quality and natural resource richness, and distinguish between different types of natural resources. Well-functioning institutions eliminate the potentially negative effect of natural resources, as they reduce the extent of rent-seeking activities often associated with point-source natural resources.

Finally, they also fnd that when natural resource richness is measured solely on the basis of oil endowment (and not using other substances such as diamonds or precious metals), support for the natural resource curse is less common. This result highlights the role of the measurement of natural resource richness, as different natural resources have different degrees of "technical appropriability".

The paper proceeds as follows. In section 2, we deduce an estimated growth model, where:

  • labour and capital efficiency are determined by several variables, including natural resources and institutional quality;
  • the first order condition for maximising profit in relation to labour is used to evaluate the contribution of the variables to real wage growth per worker and thus to productivity growth;
  • the cross-section dimension is added to formalise the final panel model specification of the wage equation, which we differentiate according to the estimation procedures; and
  • the wage equation is also used to test conditional convergence.

Comparing these results with the inconsistent pooled OLS estimates, fixed country and time effects dismiss the significant negative effect of diffuse resources on capital efficiency and the impacts of resources on labour efficiency, which are negative if they are concentrated and positive if they are diffuse. Authors conclude that natural resources have a positive impact on economic growth through the increased capital efficiency of concentrated resources, thus dismissing the hypothesis of a resource curse.

Finally, they decomposed the estimated economic growth for eight selected countries in terms of resource abundance and growth. Even though only concentrated natural resources have a significant and positive effect on growth via capital efficiency, we also measured the other contributions of natural resources to growth.

To measure natural resource abundance, they use data on rents compiled by the World Bank. Their main results do not seem to corroborate the existence of a "resource curse" among transition countries. In fact, most of their measures of resource abundance have a positive effect on economic growth. These results hold even for point-resources which are generally said to be the most detrimental to growth. On the contrary, agriculture seems to have a negative effect on growth.

These results are robust to the inclusion of additional control variables widely used in the literature.Changing the measure of economic reform (price liberalization or level of privatization) do not alter results. Their results indicate that institutional quality has a positive impact on economic growth. This interaction term has a positive impact of growth (like institutions per se) whereas the coefficient associated to natural resource abundance is now negative. The other coefficients mostly have the expected signs. They find evidence of economic convergence between countries since initial income has a negative effect on growth.

Main results are unchanged, oil exports still have a positive effect on economic growth whereas mining and agricultural exports have a negative one. They also use forest land and agricultural land as a share of total area in order to have a better measure of "diffuse resources" (since we do not have many plantation crops in transition countries contrary to Latin America or even Africa). They both have a negative effect.

They measure natural resources by resource rents as a share of GDP. Their main results do not support the idea that there is a "curse of natural resources" in transition countries. The authors find a positive and robust impact of natural resources on economic growth and this result holds even for "point resources" and oil which are generally seen as having a negative effect on economic performances. On the contrary, agriculture and forest ("diffuse" resources) seem to have detrimental effects on growth.

This study shows that natural resources export has a positive impact on growth in Mali. However, the interaction of natural resources export and corruption impact negatively on economic growth in Mali. The policy implication is that, there is need for the country to improve on the management of natural resources revenues by putting in place effective and robust policy measures to lessen and/ or possibly eliminate corruption in the public domain.

This study contributes to current literature by providing an econometric understanding of relationships in natural resources endowment and growth for SSA countries. This understanding is important for academics, policy makers and development organizations that are assisting with the growth process of Africa in shaping the future stability of natural resources infrastructure and economic growth in the region.

The attempts to provide logical explanations on the above issues constitute major challenges of the current study. Data on natural resources export, corruption index, government effectiveness, human capital, inflation, openness to trade and real gross domestic product were collected from the International Financial Statistics, the World Bank, over the period 1990-2013.

Natural Resources and Economic Growth essay

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