The Importance Of Resource Poverty

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The term, “resource curse” was first coined by Richard Auty (1990). It is used to describe how countries endowed with rich natural resources were unable to experience exponential economic growth as compared to countries with little or no natural resources. In particular, there is limited understanding on the influence of transmission channels of resource abundance on economic growth, especially when it comes to oil wealth.

This literature review aims to examine the existing transmission mechanisms between resource abundance and economic growth. It will also evaluate the research methods used.

The 4 main transmission channels

In the last 2 decades, numerous economist and political scientists have described and analysed the resource curse
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Government reduces investments in improving the infrastructure of economies as they think that resource wealth is able to sustain the country’s development. Hence, endowment rich nations can lag behind resource poor nations when the revenues are no longer sustainable.
Lastly, crowding out of human capital can occur as government spending are directed away from education to more lucrative resource exploitation businesses (Gylfason, 2001; Birdsall, 2001). This phenomenon can be contrasted with the success stories of the Four Asian Tigers where resource scarce countries like Singapore and Hong Kong, which have placed huge emphasis on education, have positive impacts on the quality of their human capital. (Young,
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However, recent literature challenges this proposition. Stijns (2005, 2006) posits that resource abundance indicators that are defined loosely are negatively associated with human capital accumulation and that their effect on growth is ambiguous. In addition, Cavalcanti et al (2009, 2011) adopted a heterogeneous panel approach across 53 countries and suggest that oil abundance generally does not lessen income except in 5 countries . They later conclude that oil abundance has positive impacts on short-run growth and real income. Also, Brunnschweiler and Bulte (2008) show that by instrumenting for “resource dependence” and adding a measure of “resource abundance”, it removes the resource curse effect.

As of now, there is limited research that evaluates the effects of oil wealth on economic growth or groups the data into developing and developed countries. In addition, past studies have mostly used cross-sectional data, which do not account for unobserved heterogeneity. Therefore, to address the gap, this study will focus specifically on oil abundance and will be using panel data to examine the causality relationship of oil abundance and economic wealth in developed and developing

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