Driving Factors of Economic Diversification in Resource-Rich Countries via Panel Data Evidence

Abdulrahman M Jolo,Ibrahim Ari,Muammer Koç

doi:10.3390/su14052797

Abdulrahman M Jolo, Ibrahim Ari + Show 1 more

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https://doi.org/10.3390/su14052797

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Journal: Sustainability	Publication Date: Feb 27, 2022
Citations: 14	License type: CC BY 4.0

Affiliation: Hamad bin Khalifa University, Qatar Foundation

Abstract

Economic diversification is an essential aspect of sustainable development as diversification enhances macroeconomic stability and promotes structural and long-term transformation not only in the economy but also in other pillars of development such as social institutions and dimensions. There is empirical evidence suggesting an impact of economic and structural factors on diversification. However, there is no consensus on the results in the literature because of various factors, such as the employment of different variables, methodologies, countries, and periods. This paper empirically explores the relations driving economic diversification in 14 resource-rich countries between 2001 and 2019, with six alternative models. In this regard, feasible generalized least squares regression was employed for the proposed model specifications. It provides strong evidence that gross capital formation, financial development, labor force participation, education, and the rule of law have statistically significant and positive impacts on economic diversification performance. On the other hand, inward foreign direct investment, real GDP growth, and self-employment rate also have statistically significant, but negative, impacts on economic diversification, probably because they further promote or are a result of resource-based growth rather than diversification into other technology- and knowledge-based sectors.

Highlights

The resource curse, called resource trap or the paradox of plenty, is a concept indicating a paradoxical phenomenon in which a country with an abundance of valuable natural resources underperforms economically
The results show that the driving factors for economic diversification are education (EDU), labor force participation (LPR), financial development (DCR), and investments in the non-resource sectors (GCF)
The results show that the self-employment rate was the only indicator among the structural variables having a significant and negative impact on economic diversification at a 1% significance level in Model 2 and Model 3

Summary

Introduction

The resource curse, called resource trap or the paradox of plenty, is a concept indicating a paradoxical phenomenon in which a country with an abundance of valuable natural resources underperforms economically. Countries become vulnerable to falls in natural resource prices and to long-run economic underperformance when they fail to make adequate investments in non-resource sectors, manufacturing. The resource curse and blessing, or the antagonistic and complementary relationship between natural resource abundance and economic development, has been broadly examined in the literature. Studies show that it causes a substantial nominal, and a real, appreciation in the currency if the currency has a floating exchange rate, and that it reduces exports in non-resource sectors because of short-term high and relatively easy earnings in the resource sectors [1].

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