An oil purse is a curse, of course?

This post is by Adam Martin, a post-doctoral fellow at DRI. In development economics everyone knows that natural resources are a curse. A well-known study by Sachs and Warner found a negative correlation between resource abundance and growth rates, while subsequent studies have shown a negative relationship with democracy.

The Curse enjoys wide appeal. Aid skeptics like that it implicates oppressive domestic government and nationalized industries. Aid supporters are drawn to its emphasis on geography (destiny!) and the indictment of global markets. And on the popular level, no one makes a better villain than oil companies. But popularity doesn't stop the story from being hot, flat, and wrong.

New research argues that empirical work on the Curse suffers from two interrelated problems. First, it uses dependence (the share of GDP from that resource) and calls it abundance (the stock of a resource in the ground). But dependence in turn depends on institutional quality—if you have sound institutions, natural resources take their place along other industries. If not, natural resources will by default constitute a large share of GDP because poor institutions stifle an advanced division of labor. When you look at cross-sectional data using dependence as a proxy for abundance, it will look like natural resources compromise institutional quality.

That reliance on cross-sectional data is the second major problem. The Curse story does not claim that Nigeria is Britain plus oil, but rather that Nigeria is less democratic than Nigeria would be in the absence of oil. One way to get around this problem is to test whether oil makes country X less democratic using panel data with fixed country effects. That’s fancy econometric speak for taking into account other factors that might make country X more or less democratic—its history, institutions, culture, etc. Fixed effects also allow testing a corollary of the Curse known as the "First Law of Petropolitics": as oil prices go up, oil-rich autocrats crack down on democracy even more.

Digging into the recent research:

• Christa Brunnschweiler and Erwin Bulte tackle the first problem. They find a positive correlation between resource abundance and both growth and institutional quality, and argue that it is conflict and poor institutional quality that lead to dependence.
• Stephen Haber and Victor Menaldo offer a great review of the second problem. They present evidence that even natural resource dependence does not undermine democratization.
• Romain Wacziarg corrects for both problems, testing for the effects of high oil prices on democracy using panel data. Again, there is no evidence for the Curse.

These studies argue that, while the Curse is plausible, domestic institutions are simply too persistent for it to matter much. Will belief in the Curse likewise prove too persistent in the face of new and better evidence?