2014-05: The spatial curse of natural resources (Working paper)

Abstract

What are the macroeconomic implications of having a resource-rich neighbour? The voluminous literature on the curse of natural resources exclusively focuses on "domestic" effects; that is, how resource intensity in country i affects country i's development. Still, there are good reasons to believe that the effects of natural resources can spread across the borders. This paper is a first attempt at understanding how the resources located in country j affect the income dynamics of its neighbour country i. Using a standard spatial econometrics approach, a measure of neighbourhood resource intensity is constructed for each of 147 countries. This measure, together with domestic resource intensity and a set of controls to account for the role of geography, culture, and institutional quality, is used as an explanatory variable in income and growth regressions. The main finding is that neighbourhood resource intensity reduces domestic income and growth, while domestic resource intensity has generally no negative effect. Interestingly, the negative spatial effect of natural resources becomes statistically less significant (and possible even insignificant) when neighbourhoods are characterized by higher income and better institutions. This in turn provides some ground for interpretation and policy recommendations.