Exogenous Resource Shocks and Economic Freedom

Abstract

An extensive literature has identified the tendency of natural resource rents to inhibit the development of quality institutions, though few studies have investigated the effects on economic institutions. We use a data set of plausibly exogenous “giant” oil field discoveries as a means of testing whether the presence of large resource rents impacts a country’s economic institutions. We find evidence of short run effects of these discoveries on the size of government spending, but find no evidence of an effect on economic institutions in general. At least for this set of resource discoveries, there is no resource curse for economic institutions.

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Notes

  1. 1.

    See Ross (2015) for a complete literature review.

  2. 2.

    Extreme bounds analysis, suggested by (Leamer, 1983), runs series of regressions with different control variables to test the robustness or fragility of a statistical finding. Kennedy and Tiede (2013) conduct this analysis for 19 different dependent variables and leading to over 18,000 specifications. Searching among alternative dependent variables presents precisely the same statistical issues which extreme bounds analysis is intended to solve.

  3. 3.

    Recent studies have used fixed effects models for this type of analysis to address concerns of omitted variable bias. Kennedy and Tiede (2013) present random effects estimates as their primary findings despite the result of the Hausman test, which indicates that a fixed effects model is preferred. Their point estimates corresponding to the subcomponents of the EFW index switch signs when estimated by a fixed effects model.

  4. 4.

    A full description of the oil discoveries data and the exogenous nature of such discoveries can also be found in “Empirical Approach” section.

  5. 5.

    In panel analysis the ICRG corruption measure is more commonly used than the Corruption Perceptions Index due to the limited time dimension of the Corruption Perceptions Index.

  6. 6.

    The likelihood of an oil discovery is unaffected the timing of a violent conflict or a lull in violent conflict.

  7. 7.

    Lei and Michaels note that the use of an indicator variable reduces measurement error that may occur due to revisions in the estimated size of the oil field.

  8. 8.

    Even the cumulative long run effect calculated from the partial adjustment model does not amount to more than two hundredths of a standard deviation decrease in EFW. This long run effect is calculated by dividing the coefficient estimate corresponding to oil discoveries by one minus the coefficient on the lagged dependent variable.

  9. 9.

    Results available upon request.

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Appendix

Appendix

See Table 7.

Table 7 Determinants of oil discoveries (fixed effects)

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O’Reilly, C., Murphy, R.H. Exogenous Resource Shocks and Economic Freedom. Comp Econ Stud 59, 243–260 (2017). https://doi.org/10.1057/s41294-017-0028-2

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Keywords

  • resource curse
  • oil
  • economic freedom
  • economic institutions

JEL Classification

  • D72
  • O13
  • P10