Do natural resources rents reduce income inequality? A finite mixture of regressions approach

Abstract

The World Bank report (2023) highlights that almost all types of natural capital, the global stock of resources and services provided by nature, are in decline while inequalities persist. Based on this context, the objective of this article is to analyze the effect of natural resources on income inequality in 73 developing countries over the period 2005–2020. Unlike previous works, this article examines the possibility that countries follow different inequality regimes and test the hypothesis that whether natural resources, reduce or increase income inequality depending on the inequality regime to which countries belong. We used a finite mixture regression model, and we found that our sample is best described by a model with five regimes of countries. The results show that the effect of natural resource rents on income inequality varies across five distinct regimes of countries. In regimes 1 and 2, natural resources have a positive effect on inequality, while in regimes 3 and 4, they have a negative effect on inequality. In regime 5, the effect is not significant. Furthermore, our analysis shows that countries that have low levels of political risk are likely to be in the regime where the dependence of natural resources decreases income inequality. These results clearly emphasize that for countries with abundant natural resources to fully benefit from reduced inequality, they must undertake strong reforms to reduce political risk. These reforms include improving the quality of the judicial system, intensifying the fight against corruption, and reducing investment risks.