I just finished teaching a class this week on the natural resource curse, and had my students read a paper by Jensen and Wantchekon, on the relationship between natural resources and democracy/governance in Africa. The paper is a decent introduction to the topic, but I use it to illustrate a deeply flawed regression analysis. Today I was browsing the past week of postings at AidWatch, and guess what? Their guest poster agrees with me.
An oil purse is a curse, of course? Published February 2, 2010 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.
To read more see link above...
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