Review of World Economics

, Volume 153, Issue 4, pp 809–832 | Cite as

Natural resource extraction, corruption, and expropriation

Original Paper
  • 196 Downloads

Abstract

We develop a formal model that looks at the mutually endogenous determination of foreign direct investments in the extraction of natural resources, at the decision of host governments to expropriate these investments, and at the level of corruption. Higher investments in resource extraction make expropriation more attractive from the perspective of national governments. A low expropriation risk is in turn an important determinant of international investments and is therefore associated with high levels of resources extraction. Moreover, investments in the resource sector also raise corruption. Our theoretical predictions are confirmed by estimations of a simultaneous equation model in which we endogenize expropriation risk, corruption, and resource extraction.

Keywords

Natural resources Expropriation Foreign direct investment Institutions 

JEL Classification

F21 D73 Q38 

References

  1. Acemoglu, D., & Verdier, T. (1998). Property rights, corruption and the allocation of talent: A general equilibrium approach. Economic Journal, 108, 1381–1403.CrossRefGoogle Scholar
  2. Ades, A., & di Tella, R. (1999). Rents, competition and corruption. American Economic Review, 89, 982–993.CrossRefGoogle Scholar
  3. Aidt, T. (2003). Economic analysis of corruption: A survey. Economic Journal, 113, 632–652.CrossRefGoogle Scholar
  4. Alzer, M., & Dadasov, R. (2013). Financial liberalization and institutional development. Economics & Politics, 25, 424–452.Google Scholar
  5. Arezki, R., & Brückner, M. (2011). Oil rents, corruption, and state stability: Evidence from panel data regressions. European Economic Review, 55, 955–963.CrossRefGoogle Scholar
  6. Asiedu, E. (2006). Foreign direct investment in Africa: The role of natural resources, market size, government policy, institutions and political instability. World Economy, 29, 63–77.CrossRefGoogle Scholar
  7. Asiedu, E., Jin, Y., & Nandwa, B. (2009). Does foreign aid mitigate the adverse effect of expropriation risk on foreign direct investment? Journal of International Economics, 78, 268–275.CrossRefGoogle Scholar
  8. Azzimonti, M., & Sarte, P.-D. (2007). Barriers to foreign direct investment under political instability. Federal Reserve Board of Richmond Economic Quarterly, 93, 287–315.Google Scholar
  9. Banerjee, A., Hanna, R., & Mullainathan, S. (2012). Corruption. MIT working paper 12–08.Google Scholar
  10. Bartolini, L., & Drazen, A. (1997). When liberal policies reflect external shocks, what do we learn? Journal of International Economics, 42, 249–273.CrossRefGoogle Scholar
  11. Bhattacharyya, S., & Hodler, R. (2010). Natural resources, democracy and corruption. European Economic Review, 54, 608–621.CrossRefGoogle Scholar
  12. Biglaiser, G., Lee, H., & Staats, J. (2016). The effects of the IMF on expropriation of foreign firms. Review of International Organizations, 11, 1–23.CrossRefGoogle Scholar
  13. Bohn, H., & Deacon, R. (2000). Ownership risk, investment, and the use of natural resources. American Economic Review, 90, 526–549.CrossRefGoogle Scholar
  14. Bremmer, I., & Johnston, R. (2009). The rise and fall of resource nationalism. Survival, 51, 149–158.CrossRefGoogle Scholar
  15. Brunetti, A., & Weder, B. (2003). A free press is bad news for corruption. Journal of Public Economics, 87, 1801–1824.CrossRefGoogle Scholar
  16. Bulte, E. H., & Damania, R. (2008). Resources for sale: Corruption, democracy and the natural resource curse. The BE Journal of Economic Analysis and Policy, 8, 1682–1935.Google Scholar
  17. Busse, M., & Hefeker, C. (2007). Political risk, institutions and foreign direct investment. European Journal of Political Economy, 23, 397–415.CrossRefGoogle Scholar
  18. Chinn, M., & Ito, H. (2008). A new measure of financial openness. Journal of Comparative Policy Analysis, 10, 309–322.CrossRefGoogle Scholar
  19. Cole, H. L., & English, W. B. (1991). Expropriation and direct investment. Journal of International Economics, 30, 201–227.CrossRefGoogle Scholar
  20. Collier, P. (2010). The plundered planet. London: Penguin Books.Google Scholar
  21. Deacon, R. T. (2011). The political economy of the natural resource curse: A survey of theory and evidence. Foundations and Trends in Microeconomics, 7, 111–208.CrossRefGoogle Scholar
  22. DiRienzo, C. E., Das, J., Cort, K. T., & Burbridge, J. (2007). Corruption and the role of information. Journal of International Business Studies, 38, 320–332.CrossRefGoogle Scholar
  23. Dreher, A. (2006). Does globalization affect growth? Evidence from a new index of globalization. Applied Economics, 38, 1091–1110.CrossRefGoogle Scholar
  24. Eaton, J., & Gersovitz, M. (1983). Country risk: Economic aspects. In R. J. Herring (Ed.), Managing international risk (pp. 75–108). Cambridge: Cambridge University Press.CrossRefGoogle Scholar
  25. Guriev, S., Kolotilin, A., & Sonin, K. (2011). Determinants of nationalization in the oil sector: A theory and evidence from panel data. Journal of Law, Economics and Organization, 27, 301–322.CrossRefGoogle Scholar
  26. Gustafson, T. (2012). Wheel of fortune: The battle for oil and power in Russia. Cambridge: Belknap Press.CrossRefGoogle Scholar
  27. Hajzler, C. (2012). Expropriation of foreign direct investments: Sectoral patterns from 1993 to 2006. Review of World Economics, 148, 119–149.CrossRefGoogle Scholar
  28. Hajzler, C., & Rosborough, J. (2016). Government corruption and foreign direct investment under the threat of expropriation. Bank of Canada Working Paper 2016–13.Google Scholar
  29. Hefeker, C., & Kessing, S. (2016). Competition for natural resources and the hold-up problem. Canadian Journal of Economics, forthcoming.Google Scholar
  30. Hendrix, C., & Noland, M. (2014). Confronting the curse: The economics and geopolitics of natural resource governance. Washington, DC: Peterson Institute for International Economics.Google Scholar
  31. Heritage Foundation (2013). Index of economic freedom dataset. Washington: The Heritage Foundation.Google Scholar
  32. Hogan, W., & Sturzenegger, F. (Eds.). (2010). The natural resources trap. Cambridge: MIT-Press.Google Scholar
  33. Hogan, W., Sturzenegger, F., & Tai, L. (2010). Contracts and Investment in natural resources. In W. Hogan & F. Sturzenegger (Eds.), The natural resources trap (pp. 1–43). Cambridge: MIT-Press.CrossRefGoogle Scholar
  34. International Monetary Fund. (2010). Managing natural resource wealth (MNRW-TTF). International Monetary Fund: Program Document. Washington, DC.Google Scholar
  35. International Monetary Fund. (2012). Macroeconomic policy framework for resource-rich developing countries. International Monetary Fund: Washington D.C.Google Scholar
  36. Islam, R. (2006). Does more transparency go along with better governance? Economics & Politics, 18, 121–167.CrossRefGoogle Scholar
  37. Joffé, G. P., Stevens, T., George, J. Lux, & Searle, C. (2009). Expropriation of oil and gas investments: Historical, legal and economic perspectives. Journal of World Energy Law and Business, 2, 3–23.CrossRefGoogle Scholar
  38. Kalenborn, C., & Lessmann, C. (2013). The impact of democracy and press freedom on corruption: Conditionality matters. Journal of Policy Modeling, 35, 857–886.CrossRefGoogle Scholar
  39. Karl, T. L. (1997). The paradox of plenty: Oil booms and petro-states. Berkeley: University of California Press.Google Scholar
  40. Kaufmann, D., Kraay, A., & Mastruzzi, M. (2010). The worldwide governance indicators: Methodology and analytical issues. Policy Research Working Paper Series 5430, The World Bank.Google Scholar
  41. Levchenko, A. (2013). International trade and institutional change. Journal of Law, Economics and Organization, 29, 1145–1181.CrossRefGoogle Scholar
  42. Manzano, O., & Monaldi, F. (2010). The political economy of oil contract renegotiation in Venezuela. In W. Hogan & F. Sturzenegger (Eds.), The natural resources trap (pp. 409–466). Cambridge: MIT-Press.CrossRefGoogle Scholar
  43. Marshall, M. G., T. R. Gurr, and K. Jaggers (2013). Polity IV project, political regime characteristics and transitions, 1800–2009. Dataset Users Manual.Google Scholar
  44. Mehlum, H., Moene, K., & Torvik, R. (2006). Institutions and the resource curse. Economic Journal, 116, 1–20.CrossRefGoogle Scholar
  45. Mohtadi, H., Ross, M., & Ruediger, S. (2016). Oil, taxation and transparency. mimeo.Google Scholar
  46. Narvaz, A. (2013). Trade openness, institutional change and economic growth. Sheffield Economic Research Paper No. 2013018Google Scholar
  47. Political Risk Services Group. (PRS. 2012). International country risk guide. New York: The PRS Group.Google Scholar
  48. Ross, M. (2012). The oil curse. Princeton: Princeton University Press.Google Scholar
  49. Shleifer, A., & Vishny, R. W. (1993). Corruption. Quarterly Journal of Economics, 108, 599–618.CrossRefGoogle Scholar
  50. Stevens, P., Koorooshy, J., Lahn, G., & Lee, B. (2013). Conflict and coexistence in the extractive industries. Chatham House Report, London: Chatham House.Google Scholar
  51. Stroebel, J., & van Benthem, A. (2013). Resource extraction contracts under threat of expropriation: Theory and evidence. Review of Economics and Statistics, 95, 1622–1639.CrossRefGoogle Scholar
  52. Thomas, J., & Worrall, T. (1994). Foreign direct investment and the risk of expropriation. Review of Economic Studies, 61, 1–108.CrossRefGoogle Scholar
  53. Tomz, M., & Wright, M. (2010). Sovereign theft: Theory and evidence about sovereign default and expropriation. In W. Hogan & F. Sturzenegger (Eds.), The natural resources trap (pp. 69–110). Cambridge: MIT-Press.CrossRefGoogle Scholar
  54. Tsui, K. (2011). More oil, less democracy: Evidence from worldwide crude oil discoveries. Economic Journal, 121, 89–115.CrossRefGoogle Scholar
  55. Van der Ploeg, F. (2011). Natural resources: Curse or blessing? Journal of Economic Literature, 49, 366–420.CrossRefGoogle Scholar
  56. Venn, F. (1986). Oil diplomacy in the twentieth century. Houndsmill: Macmillan.CrossRefGoogle Scholar
  57. Wei, S.-J. (2000). How taxing is corruption on international investors? Review of Economics and Statistics, 82, 1–11.CrossRefGoogle Scholar
  58. Wooldridge, J. D. (2010). Econometric analysis of cross section and panel data (2nd ed.). Cambridge: MIT Press.Google Scholar
  59. World Bank. (2009). Global economic prospects: Commodities at the crossroads. Washington: World Bank.Google Scholar
  60. World Bank. (2013a). World governance indicators. Washington: World Bank.Google Scholar
  61. World Bank. (2013b). World development indicators. Washington: World Bank.Google Scholar
  62. Yergin, D. (1991). The prize. New York: Simon and Schuster.Google Scholar

Copyright information

© Kiel Institute 2017

Authors and Affiliations

  1. 1.Hertie School of GovernanceBerlinGermany
  2. 2.Department of EconomicsUniversity of SiegenSiegenGermany
  3. 3.CESifoMunichGermany
  4. 4.School of Business and EconomicsRWTH Aachen UniversityAachenGermany

Personalised recommendations