Natural resource abundance, institutional quality and manufacturing development: Evidence from resource-rich countries

Abstract

The past decades provide many examples of the manufacturing sectors of resource-rich countries failing to develop more rapidly than their counterparts in countries lacking such resources. This study evaluates the impacts of natural resource rents and the quality of institutions on performance of tradable and non-tradable sectors in resource-rich countries. It examines data from 2000 to 2016 and the panel data model from 28 countries rich in natural resources and having different levels of institutional quality. The dependent variable is services etc. value added to manufacturing value added ratio. Model estimation results show that in the case of natural resource-dependent economies, this ratio increases unless there is a high level of institutional quality. Various panel regression estimations confirm that, the efficient institutional structure in natural resource-based countries, through alleviating the effects of the natural resource curse phenomenon, improves the manufacturing sector's performance in these economies. The paper concludes with a clear message to policy makers on the contributions of institutions in economic performance. It is apparent that enhancements in institutional quality allow for more effective utilization of a country's rich natural resources in strengthening the manufacturing sector to achieve higher economic growth and to mitigate the effects of the natural resource curse.