Effect of Institutional Quality and Wealth from Oil Revenue on Economic Growth in Oil-Exporting Developing Countries

Adewale Samuel Hassan,Daniel Francois Meyer,Sebastian Kot

doi:10.3390/su11133635

Adewale Samuel Hassan, Daniel Francois Meyer + Show 1 more

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https://doi.org/10.3390/su11133635

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Abstract

This article investigates the role of institutional quality in the oil wealth–economic growth nexus for 35 oil-exporting developing countries between 1984 and 2016. To achieve this objective, an empirical model was employed with linear interaction between oil wealth and institutional quality, and estimated by means of panel autoregressive distributed lag (ARDL) with a dynamic fixed effect estimator. From the results, a contingent effect of oil wealth on economic growth, both in the long run and in the short run, was established. Specifically, institutional quality was found to mitigate the negative effect of oil wealth on economic growth in the long run, while in the short run, institutional quality was found to enhance the positive effect of oil wealth on economic growth. Furthermore, the results provide the threshold levels of institutional quality, beyond which oil wealth enhances economic growth, both in the long run and in the short run, for the sampled countries. These results suggest that in order for oil-exporting developing countries to benefit from an increase in oil wealth, they must adopt appropriate policy measures to improve their levels of institutional quality and embed their entire oil wealth-generating mechanism in a sound institutional framework. Also of importance is that governments must ensure sustainable development through the benefits of wealth from oil.

Highlights

Analyses of the impact of natural resources on economic growth have been crucial to building an analytical framework for sustainable development in resource-rich developing countries
The error correction term is negative, less than unity, and significant, signifying the existence of a long-run relationship and the fact that previous deviation from equilibrium would be corrected in the current period. These results indicate that the findings in this study are consistent, irrespective of whether the institutional quality is measured by the International Country Risk Guide (ICRG) variables or the World Governance Indicators (WGI) variable
The relationship between natural resources and economic growth has long remained a subject of debate in the literature

Summary

Introduction

Analyses of the impact of natural resources on economic growth have been crucial to building an analytical framework for sustainable development in resource-rich developing countries. Studies have shown that resource-rich economies have tended to record slower growth than relatively resource-poor countries [5,6,7,8,9,10,11,12] This anomaly has led to a debate in the literature, giving rise to the natural resource curse hypothesis, which relates abundant resources to lower growth [1] and to armed civil conflict [13]. Botswana has been one of the fastest growing economies in the world since 1965, despite relying on diamonds for at least 40% of its GDP [5] These examples corroborate some recent findings that challenge the existing resource curse literature. These studies opine that abundant natural resources strongly enhance economic growth and welfare [17,18,19,20,21,22]

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