Natural resource wealth and the informal economy
| Published date | 01 June 2023 |
| DOI | http://doi.org/10.1177/0192512121991973 |
| Author | Robert G Blanton,Dursun Peksen |
| Date | 01 June 2023 |
| Subject Matter | Original Research Articles |
https://doi.org/10.1177/0192512121991973
International Political Science Review
2023, Vol. 44(3) 418 –433
© The Author(s) 2021
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DOI: 10.1177/0192512121991973
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Natural resource wealth
and the informal economy
Robert G Blanton
University of Alabama at Birmingham, USA
Dursun Peksen
University of Memphis, USA
Abstract
The ‘resource curse’ associated with natural resource abundance has long been a subject of study across
multiple disciplines. Though much research has focused on possible effects of resource wealth on the formal
economy, little is known about how such wealth affects the informal sector, a substantial portion of global
economic activity. We posit that resource windfalls directly contribute to growth in the informal economy,
as investment and spending patterns associated with such revenues limit opportunities within the formal
sector and thus channel more labor and businesses into the informal sector. We test these claims across a
panel of over 120 countries for the period 1985 to 2012. Across multiple model specifications, we find that
resource wealth growth is associated with increased informal economic activity.
Keywords
Resource wealth, informal economies, rentier states, shadow economic activity
Introduction
Does natural resource wealth contribute to a larger shadow economy? The shadow economy, also
referred to as the underground, illicit, illegal, or informal economy, encompasses a substantial por-
tion of global markets.1 According to a recent International Labour Organization (ILO) study, over
60% of the global work force is in the informal sector (ILO, 2018a). The shadow economy is par-
ticularly prevalent in the developing world. For instance, 85.8% of employment in Africa and
68.6% in the Arab States is informal. Yet it also constitutes almost a fifth of total employment in
the developed world (ILO, 2018a). The potential impact of the shadow economy could thus be
substantial. Whereas some view it as an ‘engine of innovation’ (Kraemer-Mbula and
Wunsch-Vincent, 2016), others posit that the informal economy connotes ‘a lack of social protec-
tion, rights at work and decent working conditions’ (ILO, 2018b).
Corresponding author:
Robert G Blanton, Department of Political Science and Public Administration, University of Alabama at Birmingham, 414
Heritage Hall, 1401 University Blvd, Birmingham, AL 35223, USA.
Email: rgblanton@uab.edu
991973IPS0010.1177/0192512121991973International Political Science ReviewBlanton and Peksen
research-article2021
Original Research Article
Blanton and Peksen 419
More broadly, the presence and growth of the shadow sector raises foundational issues for
political scientists, including the nature and formation of markets as well as the role of states in
regulating their economies (Andreas, 2004). Given the scope and importance of the shadow econ-
omy, a great deal of academic work, primarily in economics, has examined the factors conducive
to its growth (Schneider and Enste, 2013). Yet there is a relative dearth of research on the shadow
economy within the political science literature (Andreas, 2004; Early and Peksen, 2019).
By way of contrast, there is a considerable body of research on the ‘resource curse’, defined as
‘the tendency of resource rich. . .economies to underperform in economic growth and other devel-
opment outcomes’ (Papyrakis, 2017: 175). More specifically, countries with rich oil, natural gas,
and/or mineral reserves might face a myriad of negative and political outcomes, including reduced
economic growth, autocratic and ineffective governance, repression, and civil conflict (Moore,
2004; Ross, 2015; Vadlamannati and De Soysa, 2016; Wegenast, 2013; Wright et al., 2015).
There is ample reason to expect these two phenomena—the shadow economy and resource
dependence—are related. For example, NGO (Non-Governmental Organization) reports on illicit
financial flows note that resource wealth is a readily appropriated for such purposes, and that states
‘highly dependent on natural resources are among the most severely affected by the problem of illicit
financial flows’ (Le Billon, 2011: 1). These flows can represent substantial financial assets that are sim-
ply removed from the formal economy into personal coffers to the detriment of the states themselves. In
some cases, they even exceed foreign aid or inbound foreign direct investment (Global Financial
Integrity, 2017). Additionally, human rights groups widely criticize the tendency of many resource-rich
countries, most famously Qatar, for using large pools of informal labor for major construction and infra-
structure projects, often under dangerous and poorly regulated conditions (Human Rights Watch, 2017).
Left unanswered is whether such cases are isolated instances of malfeasance in a handful of
countries, or whether resource abundance is related to broader-based movements into the informal
sector. Indeed, despite these potential linkages, as well as the substantial bodies of work on both
the ‘resource curse’ and the informal economy, the potential relationship between the two has
never been examined in a comprehensive and systematic fashion. This is an important omission
given the size of the informal sector within many economies and the roles that this sector plays
within the broader global market.
Toward better understanding potential linkages between these two phenomena, we develop a
theoretical framework for understanding these relationships and empirically assess the impact of
increased natural resource revenues on the growth of the shadow sector across over 100 countries
for the years 1985 to 2012. Drawing from extant theories and approaches from multiple bodies of
literature, we posit that resource revenues directly affect growth in the shadow economy, as it both
limits the opportunities available to workers in the formal sector and incentivizes rent-seeking
behavior outside of the formal economy. Our results lend strong support for a significant linkage
between more resource wealth and the growth of the informal economy.
In the following section, we introduce relevant bodies of research on the political economy of
resource wealth and informal economies, and then situate our study within extant scholarship.
Next, we present our theoretical framework and advance our hypotheses. We then explain our data
and methodological specifications, and discuss the data findings. We conclude with a brief discus-
sion of possible research and policy implications of our analysis.
Resource wealth and the shadow economy
Relevant literature
A great deal of work has delineated a wide range of political and economic consequences of
resource wealth. The underlying assumption is that income derived from natural resources has
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