Curse or Blessing? The Effect of Natural Resources Abundance on Human Development and Institutional Quality

Natural resources can be a very valuable input for a country's economic development. In fact, according to De Ferranti et al (2002, p.6) some countries like Australia, Canada, Finland, Sweden and the United States based their development on their abundant natural resources. Similarly, we can also mention Norway, one of Europe's poorest countries in 1900, but now one of its richest. Also in this case, its growth was led by natural resources such as timber, fish and hydroelectric power and more recently oil and natural gas (Mehlum, Moene, Torvik, 2006). Another resources-rich growth-winner is undoubtedly Botswana, with 40% of GDP stemming from diamonds, which has had the world's highest growth rate since 1965 (Mehlum, Moene, Torvik, 2006). Yet at the same time, there are countries endowed with incredible amounts of natural resources wealth but that, surprisingly, are among the poorest in the world. Good examples are some African countries such as Nigeria, rich in oil but with persistently low or even negative growth rate (Ogunleye, 2008) or Sierra Leone, with one of the biggest diamonds reserves in the world but also with one of the highest poverty rates; some middle Eastern countries, like Iran and Iraq, both very rich in oil but struggling to develop, or even Latin American countries like Venezuela, the country with the largest amount of proven oil reserves in the world, but whose economy is currently in big distress. This latter phenomenon, known in the literature as the ¿natural resources curse¿, has been studied extensively, mainly with the purpose of finding a suitable explanation for such a counter-intuitive evidence. Why would a country endowed with great amounts of valuable natural resources perform so poorly in terms of economic growth? The literature on the resources curse is wide and entails many hypothesis about the causes and mechanisms that regulate such phenomenon. In this thesis, I will focus on the role that institutions play in shaping the outcomes of resources abundance. My aim is to test the hypothesis that institutional quality determines whether a country will exploit its natural resources effectively to achieve development or if it will use them in an inefficient way with the result of remaining underdeveloped. If this hypothesis is proved right, this would suggest that resources abundance is not a problem per se (as sustained by the ¿fathers¿ of the resources curse literature, Sachs and Warner (1995, 1997)), but it becomes detrimental only when institutions are not strong enough.