Exogenous Resource Shocks and Economic Freedom

Abstract

There is an extensive literature on the presence of valuable natural resources creating a competition for control of central states and resource rents. This mechanism has been argued to be an important underlying factor preventing certain countries from acquiring good institutions and achieving long run economic growth. In this paper, we use a recent data set on the discovery of large, exogenous oil field discoveries as a means of testing whether the presence of large resource rents maligns the freedom of a country’s economic institutions. We find there to be some evidence of contemporaneous effects of these discoveries on the size of government spending, especially transfer payments and subsidies, but this does not show up in our overall measure of economic freedom. These effects also dissipate with time to statistical and economic insignificance, suggesting the discoveries have short run effects on policy but do not impact the underlying institutions at all. At least for this set of exogenous resource discoveries, there is no resource curse for economic freedom.