Natural Resource Exports, Fiscal Policy Volatility and Growth
| Author | Michael Bleaney,Håvard Halland |
| Date | 01 November 2014 |
| Published date | 01 November 2014 |
| DOI | http://doi.org/10.1111/sjpe.12055 |
NATURAL RESOURCE EXPORTS,
FISCAL POLICY VOLATILITY AND
GROWTH
Michael Bleaney* and H
avard Halland**
ABSTRACT
The combination of poor institutions and erratic macroeconomic policy, as mea-
sured by the volatility of fiscal policy, is associated with slower growth. We show
that macroeconomic policy is more erratic in countries that are rich in natural
resources, especially minerals and fuels, and in those that receive large aid
inflows. Poor institutions also play a role. Although Africa is a major receiver of
aid and exporter of natural resources, this is not purely an African phenomenon.
Output volatility is not associated with slower growth after controlling for insti-
tutions and the volatility of fiscal policy.
II
NTRODUCTION
This article brings together two different strands of literature: (1) the idea of
the ‘resource curse’ –that an abundance of natural resources, although
favourable in the short run, may hold back a country’s development in the
longer run –and (2) the effect of the quality of fiscal management on growth,
and what sort of institutions or conditions promote good fiscal management.
The likely negative impact of a resources boom on other tradable sectors
has been known for a long time (Corden and Neary, 1982), but the idea of a
‘resource curse’ is reflected most prominently in the growth regressions of
Sachs and Warner (1995, 1997, 2001), who found a strong negative impact of
the share of natural resource exports in GDP in a cross-country growth
regression for the period 1965–1990. Bleaney and Nishiyama (2002) show that
Sachs and Warner’s findings are robust to the inclusion of other explanatory
variables from the growth models of Barro (1997) and Easterly and Levine
(1997). Nevertheless, other authors have questioned whether an abundance of
natural resources is typically or universally bad for growth (Brunnschweiler,
2007; Brunnschweiler and Bulte, 2008; Lederman and Maloney, 2008; Van der
Ploeg and Poelhekke, 2010). Mehlum et al. (2006) provide evidence that the
resource curse is concentrated in countries with bad institutions. They show
*University of Nottingham
**World Bank
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12055, Vol. 61, No. 5, November 2014
©2014 Scottish Economic Society.
502
that an interaction term between resource abundance and institutional quality
is significant in the Sachs and Warner (1997) data set. In their theoretical
model, institutional quality directly affects the relative profitability of unpro-
ductive (‘grabber’) and productive entrepreneurial use of natural resources,
but beyond that the mechanism is unspecified.
The purpose of the current article was not to continue the debate about
whether resources are a ‘curse’, which seems to depend to a considerable
degree on the chosen measure of resource abundance (share of resource
exports in GDP, share of rents in GDP, or value of subsoil assets), but rather,
as in Mehlum et al. (2006) and Van der Ploeg and Poelhekke (2009), to exam-
ine what factors determine the growth performance of resource-rich econo-
mies. Is it low institutional quality, as argued by Mehlum et al. (2006), or the
volatility of annual growth rates, as stressed by Van der Ploeg and Poelhekke
(2009), that makes resources a curse, or are there other factors as well?
Our results suggest that both natural resources and aid flows are associated
with poor macroeconomic policy, as measured by the volatility of government
expenditure, and that the combination of low-quality institutions and poor
macroeconomic policy is particularly bad for growth. It is these factors rather
than output volatility that matter for growth. The findings of Van der Ploeg
and Poelhekke (2009) with respect to the volatility of output (or more accu-
rately growth rates) seem not to be robust to measuring growth at constant
local prices rather than at the theoretically inferior international prices that
Van der Ploeg and Poelhekke (2009) use.
The mechanisms through which the resource curse might work are in general
rather unclear. One possibility is that, because of the price volatility of natural
resources, countries that specialize in them experience greater real exchange
rate volatility (Bleaney, 1996; Cashin et al., 2004), although a robust negative
relationship between real exchange rate volatility and growth remains to be
demonstrated. Another is that natural resources may give rise to civil conflict
(Lujala et al., 2005; Ross, 2006; Lujala, 2009) or affect political structures and
incentives (Ross, 2001; Isham et al., 2005; Caselli and Cunningham, 2009).
Tornell and Lane (1999) present a theoretical model in which, in the absence
of strong legal-political institutions, politically powerful groups are able to
shift resources to a less efficient, but untaxable, informal sector, and this effect
reduces growth. A related idea, and the one that we pursue here, is that access
to natural resource rents distorts fiscal policy, leading to overexpanded govern-
ment consumption and general wastage. These ideas may be more applicable
to resources whose extraction is highly geographically concentrated, so we also
investigate whether it is important to distinguish between point-sourced
resources (fuels and minerals) and diffuse ones (agriculture and food).
The role of the quality of macroeconomic policy in growth is more contro-
versial. As is implied by the title of their article (‘Institutional Causes, Macro-
economic Symptoms’), Acemoglu et al. (2001) argue that macroeconomic
policy merely reflects the quality of a country’s institutions and that, once
institutions are controlled for, measures of macroeconomic policy such as the
share of government consumption in GDP, the inflation rate or real exchange
NATURAL RESOURCE EXPORTS, VOLATILITY AND GROWTH 503
Scottish Journal of Political Economy
©2014 Scottish Economic Society
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