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Does natural resource abundance breed corruption? The role of political institutions

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Abstract

Over the last few decades, the effect of natural resources on economic growth has become a long-debated issue. Countries with abundant natural resources grow in different ways. Various studies have examined the resource curse hypothesis and found evidence both for and against this hypothesis. Recent studies are giving importance to whether the resource abundance countries are corrupt. This study explores the association between the perceived level of corruption and natural resource abundance in conjunction with the quality of political institutions. This study examines the threshold effect of the quality of political institutions on corruption in resource-abundant countries. Using a sample of 179 countries from 2002 to 2014, this study preliminary identifies the determinants of corruption. Using OLS, 2SLS and panel system GMM estimation techniques, this study finds that resource abundance countries are always at risk of corruption. The findings also suggest that average growth rates, openness of the country, rule of law, democracy, government expenditure, inequality and ethnicity are the significant determinants of corruption. We examine the effect of the interaction term between resource abundance and the quality of political institutions and find that the effect is negative if the institution’s quality is above the threshold value. In the case of country groups, the effects are not similar for all country groups. Those countries that achieve the threshold value can escape the resource effect of corruption. The government and other donor agencies can help resource-rich developing countries develop the quality of institutions and thus reduce corruption.

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Fig. 1

Source: Neudorfer (2018), Tsani (2013) and Authors

Fig. 2

Source: Tadjoeddin (2007)

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Notes

  1. It measures the judicial system’s reliability, transparency and predictability, ease of contract enforcement, crime rates and the security of property rights. This study uses this variable as the proxy for political institutions.

  2. The definition of variable and the sources are given in the next section.

  3. We also use the simple specification from Leite and Weidmann (1999). In this specification, we neglect the interaction variable. Our preliminary examination is to check whether resource abundance produce corruption or not. We use various control variables and proxy for quality of institution. We also use various measurement for natural resource abundance. This preliminary examination proceeds us to examine our main hypothesis.

  4. We would like to thank the reviewer to guide us to use CPI to identify the determinants of corruption. In this case, political institution variable cannot be used. For the brevity of the space, the CPI results will be given upon request.

  5. We examine this issue in our OLS estimation.

  6. Sources and definition of variables are given later.

  7. We would like to thank the reviewer for their suggestions to represent the estimation results using both COC and ICRG.

  8. The correlation between COC and its lag is 0.99 and the same for ICRG is 0.97. See also Asongu and Nwachukwu (2015).

  9. See Arellano and Bover (1995), Blundell and Bond (1998).

  10. We use STATA’s xtabond2 command for 2-step system GMM estimation. For more details, see Roodman (2009).

  11. We consider one break point as multiple break point may create problems in policy decisions.

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Acknowledgements

The authors would like to thank the editor and the anonymous referees for their very helpful comments and suggestions. This research was completed under the Small-Grant Research Scheme of Shahjalal University of Science & Technology (SUST), Sylhet-3114, Bangladesh. The authors would like to thank Professor Dr. Saleh Uddin, Former Vice Chancellor of SUST, for his kind consideration for small grants. The draft version of this article was presented at the Conference on Bangladesh Development Perspectives: Issues in Economic Justice & Morality, organized by the Department of Economics, Shahjalal University of Science & Technology, Sylhet-3114, Bangladesh, during 30–31 January 2019.

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    Mohammad Abdul Munim Joarder & Monir Uddin Ahmed

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The authors analyzed secondary data provided by Word Development Indicators (WDI) of World Bank, Worldwide Governance Indicators (WGI) of World Bank, Quality of Government (QoG) dataset of University of Gothenburg, Transparency International (TI), World Income Inequality Database (WIID), Freedom House, Polity IV and other datasets. All datasets are publicly available. We used ICRG’s (International Country Risk Guide) dataset which was pay walled. In many cases, the authors used researcher’s dataset from their supplementary in the journal’s website. All the calculations and the construction of variables are based on respective methodologies.

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Joarder, M.A.M., Ahmed, M.U. Does natural resource abundance breed corruption? The role of political institutions. SN Bus Econ 3, 178 (2023). https://doi.org/10.1007/s43546-023-00545-x

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