Natural resource depletion and the resource curse
Abstract
This thesis studies the relationship between natural resources and economic wealth, in two
parts. Previous studies have found a negative relationship between natural resources and
economic wealth, a phenomenon known as the curse of natural resources. Later studies
reject the resource curse, in its simplest form, as their findings show a positive relationship
when measuring economic wealth by GDP levels instead of growth. The argument
is that the inclusion of initial GDP, when using GDP growth as measurement, will result
in biased estimates due to the short time horizon. However, a third group of studies
advocates the existence of a resource curse conditional upon institutional quality. In this
case, resource endowment only affects the economic welfare negatively if the quality of
institutions is sufficiently bad.
In this thesis the measurement of economic wealth is further expanded. Taking into
account that extraction of resources is a negative flow of the nation’s wealth gives a
better understating of the change in welfare, and removes some of the positive bias of
exploiting natural resources on economic wealth. An empirical analysis, utilizing data on
a total of 263 countries in year 2000, is conducted to find whether the resource curse is
still rejected when including depletion of natural resources to the analysis. None of the
estimation methods or model specifications in this thesis are able to confirm the existence
of a resource curse, and in its simplest form the rejection is supported. Also the
conditional resource curse is rejected by the data material, meaning that countries with
poor institutions do not seem to have a more negative, or less positive, impact of natural
resources on GDP levels adjusted for depletion of natural resources than countries with
good institutions. However, be aware of the limitations of the data, in particular the
absence of a truly exogenous variable of resource endowment.