How to reduce the degree of dependency on natural resources?

Abstract

Many natural resources rich countries are characterized by natural resource dependency and lack of economic diversification. They experience lower economic growth due to excessive exploitation of natural resources, high resource price volatility, undermining the competitiveness of the non-natural resources sectors, and weak institutional quality. Economic diversification is viewed as a long-term solution to high economic dependency on natural resources. Although this diversification can take place in every sector of the economy, economic dependency on natural resources can be reduced through both private sector development and public sector reforms. This empirical research examines the factors that may affect a country's degree of dependency on natural resources. A dynamic flexible adjustment model is employed om an unbalanced panel data for 110 countries from 1990 to 2017, to estimate the relationship between private sector development, public sector reforms, taxation systems, and dependency on natural. The findings reveal that the degree of dependency on natural resource revenue will reduce with the development of the public sector including privatization and development of national taxation systems. Institutional quality and human development are crucial for reducing this dependency and the speed at which countries transition towards an optimal level of diversification.