Report

Commodity Dependence and Fiscal Capacity

Mauricio Cárdenas, Santiago Ramírez, and Didem Tuzemen

Introduction

Existing research has shown that natural resource wealth of a country can be a curse or a blessing for the country’s economic development. A number of studies in the growth literature, most notably Sachs and Warner (1995ab, 1997, 1999, 2001) argue that natural resource abundance has a negative impact on economic growth. In contrast, others point that resource booms during the nineteenth century led to higher economic progress in Latin America, while natural resource wealth in Great Britain and Germany made the industrial revolution possible (Papyrakis and Gerlach, 2003). A more recent success example is Norway, where natural resource wealth has contributed to higher economic growth.

These apparently contradictory results suggest that it may not be natural resource wealth or abundance alone that drives the development process. What seems to actually matter is how this resource wealth is utilized. Lane and Tornell (1996, 1999), Baland and Francois (2000), Torvik (2002), Mehlum et al. (2006) and more recently Bhattacharyya and Hodler (2010) show that the impact of natural resource wealth depends mainly on the quality of institutions. The main message of this growing body of literature is that the so-called “resource curse hypothesis” tends to be valid in countries with “grabber-friendly” institutions. The higher the “appropriability” of natural resources by specific groups in the society, the higher the likelihood that they lead to rent-seeking activities and conflicts (Boschini et al., 2007). Robinson et al. (2006) find that countries with strong institutions which promote accountability, political stability and efficient redistribution are likely to benefit from natural resources, rather than suffer from a resource curse.

While the effect of institutions on the impact of natural resource wealth or abundance is well-established, the impact of natural resources on institutional development has been less explored. Filling this gap is the main goal of this paper.