Capital formation and natural resources extraction: A source of sustainable development or a curse for the economy?

Abstract

Based on the evidence that gross capital formation contracted during the Covid-19 pandemic, the drivers of contraction were mainly natural resources volatility and economic growth disturbance. Hence, during the post-pandemic, when the economic system is going towards recovery, policymakers have focused on the concerns of the contraction of gross capital formation in low-income economies; thus, this issue requires attention. Hence, this study examines the impact of natural resource rents and economic growth on the gross fixed capital formation of low, and middle-income aggregate groups from 1985 to 2021. We have leveraged various time series econometric techniques for this study, including the ADF-GLS unit root test, which examines the stationarity of modeled variables. The study found that coal, forest, and oil rents are stationary at level (0), whereas the remaining modeled variables are stationary at I (1). This study found long-term cointegration of dependent and explanatory variables through Bayer-Hanck cointegration. The study's empirical results demonstrate that GDP, oil rents, and forest rents significantly positively impact gross fixed capital formation. In contrast, natural gas rents reduce gross capital formation for the FMOLS, DOLS, and CCR methods. Moreover, the study found the impact of mineral and coal rents insignificant and inconclusive. The Robustness check results provide similar results in robust regression analysis and quantile regression. However, oil rents were found to be significant in lower quantiles and became insignificant in the upper quantiles. Thus, this study suggests policy implications regarding efficient and sustainable usage of natural resources to generate enough revenues for gross fixed capital formation.