Is it true that Good Institutions Alleviate the Resource Curse? A Reassessment of Existing OLS Cross Country Evidence Malebogo Bakwena*

Abstract The paper tests the hypothesis that the effect of resources on growth is conditional on the quality of institutions, by further building on Mehlum, Moene, and Torvik’s (2006b) influential work. Advances are made by re-testing the hypothesis, using: (a) a dataset of up to 53 countries over the period 1984-2003; and (b) a resource abundance indicator that focuses on non-renewable resources alone rather than the ones commonly used in the literature that include renewable resources, which are inappropriate. The empirical results of the paper confirm the hypothesis that resource rich economies are not destined to be cursed if they have good institutions. Keywords: World economic growth, resource curse, institutions

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Senior Lecturer at the University of Botswana, Department of Economics, Private Bag 0022 Gaborone, Botswana. E-mail: thokweng@mopipi.ub.bw, Telephone: (+267) 3552151, Fax: (+267)3972936.

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1. Introduction Contrary to conventional theory, a growing body of evidence suggests that economies with abundant natural resources perform badly in terms of economic growth relative to their resource poor counterparts—the so-called resource curse hypothesis. However, this general hypothesis is not robust. It clearly fails to account for the differing experiences of resource abundant economies. For instance, the theory, applied generally, offers no explanation as to why economies like Botswana and Norway have exceptional growth, while Saudi Arabia and Nigeria have stagnated. Prompted by these experiences, the paper investigates the circumstances under which the curse is more or less likely to exist. In particular, the paper finds evidence that the major reason for the diverging experiences is the differences in the