Can fossil fuel endowments steer economic development? Evidence from the linkages approach

Abstract

The economic and political literature is not conclusive about whether large natural resource endowments diminish growth and development prospects, about the diverse political, economic, and institutional causal mechanisms that lead to Resource Curse and Dutch Disease phenomena, and about the most suitable and effective counteracting measures against these problems. This article adds further evidence to the debate through the linkages approach, primarily associated with Albert Hirschman. By calculating Rasmussen-Hirschman linkages for 42 countries from the WIOD database for 2000–2014, which are subdivided into two groups of countries - one with above and another with below OECD average fuel exports, it suggests that there is a larger likelihood that countries that export fewer fossil fuels to experience higher growth in their manufacturing sector linkages. However, because these two groups are not homogeneous in their relationship between GDP per Capita growth, the size of their linkages, and the growth of the size of their manufacturing value-added in their GDPs, a panel data econometric exercise further subdivides the two country groups in above and below-average GDP per capita. It regresses the manufacturing sector’s backward and linkages with selected variables. The econometric exercise presents evidence that countries with higher GDP per capita and that export more fuels than the OECD average have a larger probability of success than countries with above-average fossil fuels exports and below OECD average GDP per capita. This shows that natural resource exploitation and fuel exports are more likely to be a curse in countries that have not reached a certain threshold of institutional quality, physical and intangible capital accumulation, making it more difficult for them to reap the fruits of natural resource exploitation fully.