Working Paper: CEPR ID: DP2743
Authors: Thorvaldur Gylfason; Gylfi Zoega
Abstract: Empirical evidence seems to indicate that economic growth since 1965 has varied inversely with natural resource abundance across countries. This Paper proposes a linkage between abundant natural resources and economic growth, through saving and investment. When the share of output that accrues to the owners of natural resources rises, the demand for capital falls, leading to lower real interest rates and less rapid growth. Institutional reforms paving the way to a more efficient allocation of capital may, however, enhance the quantity as well as the quality of new investment and sustain growth. Empirical evidence from 85 countries from 1965-98 suggests that abundant natural capital may on average crowd out physical capital thereby inhibiting economic growth. The results also suggest that abundant natural resources may hurt saving and investment indirectly by slowing down the development of the financial system. High growth rates in a handful of formerly resource-dependent economies seem to indicate that economic and structural reforms can overcome any adverse effect of natural resources on economic growth.
Keywords: Economic Growth; Investment; Natural Resources
JEL Codes: O11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in the share of natural resources in national wealth (Q32) | Decrease in the optimal saving rate (D15) |
| Decrease in the optimal saving rate (D15) | Decrease in economic growth (F69) |
| Increase in the share of natural resources in national wealth (Q32) | Decrease in economic growth (F69) |
| Natural capital share (D33) | Investment in physical capital (E22) |
| Abundant natural resources (Q33) | Impedes development of financial institutions (F65) |
| Impedes development of financial institutions (F65) | Harms saving and investment (E21) |
| High natural resource abundance (Q33) | Crowds out physical and human capital (E22) |
| Crowds out physical and human capital (E22) | Slower economic growth (F69) |