The Varieties of Rentier Experience: How Natural Resource Endowments Affect the Political Economy of Economic Growth* Jonathan Isham Michael Woolcock Middlebury College World Bank Lant Pritchett Gwen Busby Harvard University Yale University This draft: January 8, 2002 Abstract: Many oil- and mineral-rich countries have not fared well since the oil shock of the early 1970s. This paper tests the hypothesis that a developing country’s natural resource endowment affects economic growth through its influence on socioeconomic and political institutions. The paper’s thesis is that different export structures—whether foreign exchange is derived primarily from manufactures, diffuse natural resources, point-source natural resources, or coffee/cocoa natural resources—create differential institutional capacities to manage shocks and reduce social and economic divisions in developing countries. Using one new and one established measure of natural resource abundance as exogenously-determined instruments, we find evidence to support the hypotheses that countries that are abundant (scarce) in point-source natural resources have weaker (stronger) institutional capacities; and that these endogenously determined institutional capacities are significant and large determinants of growth since the oil shock. Specifically, three-stage least-squares estimates show that (a) being a point-source economy is associated with having worse institutions (at least a one standard deviation decrease); and (b) having worse institutions translates into a GPD per capita that, 25 years after the oil shock, is almost 33 percent lower than countries with better institutions. Keywords: economic growth, institutions, natural resource endowment JEL Codes: 013; 050; Z13 * We thank William Easterly, Dani Kaufmann, and Michael Ross for their rapid and informative sharing of data and ideas, and Richard Auty and Jean-Philippe Stijns for useful comments. We also thank the Department of Economics and the Program in Environmental Studies at Middlebury College for research support. An earlier version of this paper (Woolcock, Isham, and Pritchett 2001) was prepared for—and benefited from discussions among other contributors to—the UNU/WIDER Project on Resource Abundance and Economic Growth. Please address comments to [email protected] and [email protected] The rentier state is a state of parasitic, decaying capitalism, and this circumstance cannot fail to influence all the socio-political conditions of the countries concerned. Vladimir Lenin, Imperialism, the Highest Stage of Capitalism1 It matters whether a state relies on taxes from extractive industries, agricultural production, foreign aid, remittances, or international borrowing because these different sources of revenues, whatever their relative economic merits or social import, have powerful (and quite different) impact on the state’s institutional development and its abilities to employ personnel, subsidize social and economic programs, create new organizations, and direct the activities of private interests. Simply stated, the revenues a state collects, how it collects them, and the uses to which it puts them define its nature. Terry Karl, The Paradox of Plenty2 I. Introduction In recent years, many researchers have weighed in with explanations for the big differences in growth performance from the mid-1970s to the mid-1990s among economies with different natural resource bases (see, among others, Auty 1995; Leamer et al 1999; Leite and Weidmann 1999; Ross 1999, 2001; Sachs and Warner 1995 [2000], 1999; Stijns 2001). Woolcock, Pritchett and Isham (2001) hypothesized that the differential capacity to handle growth collapses among economies with different types of export revenue streams—manufacturing, “point source” natural resources (e.g., oil, diamonds, plantation crops), “diffuse” natural resources (e.g., wheat, rice, animals), or coffee/cocoa—is largely a function of varying socioeconomic and political institutions. This paper presents new econometric evidence to support this hypothesis. Figures 1 and 2 summarize the varied growth performance that we are trying to partially explain.3 As shown in Figure 1, all developing countries performed relatively well from the mid 1950s to the mid 1970s; they enjoyed a median annual growth rate of 2.3 percent over this 1 Cited in Ross (2001: 329, fn. 6) 2 Karl (1997: 13) 3 These figures originally appeared in Woolcock, Pritchett and Isham (2001)3 period. From the mid 1970s until the mid 1990s, by contrast, developing economies endured a growth collapse of “Grand Canyon” proportions, setting back their development agenda by at least a decade. Figure 2 shows that, from the mid 1970s to the mid 1990s, manufacturing, diffuse, point source, diffuse, and coffee/cocoa economies responded differently to the growth collapse. Manufacturers had always done well (note: this sample includes India and Bangladesh, not just the East Asian NICs), and while they experienced a mild downturn in growth rates in the mid 1970s, they responded quickly and effectively. Diffuse resource economies were also adversely affected, but they show a steady rate of recovery. The point source and the coffee/cocoa Figure 1: Smoothed Median Per Capita Growth Rates in 90 Developing Economies, 1955-1997-1012341955195819611964196719701973197619791982198519881991199419974 economies, however, experienced a protracted growth collapse. Why? Our contribution in this paper is to show how the profile of a country’s sources of export revenue—i.e., how a country earns its living and pays its bills—affects economic growth. We show that a profile with a bias towards point-source natural resources such as oil, minerals, and plantation crops is strongly associated with societal division and weak public institutions which, in turn, are strongly associated with slower growth. The rest of this paper is organized as follows. Section II summarizes some recent relevant headlines, details our hypothesis, and motivates the test of our central hypothesis with some illustrative cross-tabulations. Section III presents our econometric model and summarizes the available data for testing the model. Section IV presents our main empirical results, and Section V presents various robustness checks of these results. Section V discusses and concludes. Figure 2: Smoothed Median Growth Rates for 90 Developing
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