Is natural capital a blessing or a curse for capital accumulation in low income countries?

Abstract

The aim of this paper is to re-examine the validity of the resource curse hypothesis between produced capital and natural capital for 22 low income countries (LIC) over the period 2002–2018. We use the World Bank's unique global asset database that measures the value of a nation's wealth in terms of natural capital, produced capital, and human capital in 2018 constant prices and include also other key drivers of capital accumulation such as financial development, globalisation, corruption, and economic growth. We applied the Methods of Moment Quantile Regression (MMQR), and to produce robust findings, we also applied other econometric estimators including the Driscoll-Kraay, FMOLS and DOLS. These three estimators show that natural capital, human capital, and globalisation were positively and significantly related to produced capital. The MMRQ results also showed a significantly positive relationship between natural capital, human capital, and financial development. The impact of natural capital, human capital and financial development is relatively stronger in higher quantiles compared to middle and lower quantiles. Similarly, globalisation (overall and economic), was positively and significantly related to produced capital per capita. In contrast, corruption was negatively and significantly related to produced capital per capita, indicating that there is a need for transparency and accountability. Granger causality tests indicate a unidirectional causality from produced capital to natural capital, to human capital, and to financial development indicating a capital accumulation-led growth. The paper finds that natural resource wealth is a blessing for capital accumulation and rejects the resource curse hypothesis between produced capital and natural capital. Many LIC are blessed with abundance of natural resources and the misuse of these resources can be detrimental to capital accumulation. Proper management of natural resources by developing institutions that discourage corruption and promote transparency and accountability are vital for making natural resource a ‘blessing of plenty’. Financial development, human capital and integrating LIC economies with the global economy can also help in making resource abundance a blessing.