Natural Resource Booms and Inequality: Theory and Evidence

Abstract

Surprisingly little is known about the impact resource booms on income inequality in resource rich countries (Ross, 2007). This paper develops a simple theory, in the context of a two sector growth model in which learning-by-doing drives growth, to explain the time path of inequality following a resource boom. Under plausible conditions, we find that income inequality will fall in the short run immediately after a boom, and will then increase steadily over time as the economy grows, until the initial impact of the boom on inequality disappears. Using panel co-integration methodology for a sample of 90 countries between 1965 and 1999, we test the predictions of the model empirically. We find strong evidence in support of the theory. Resource booms, especially mineral booms, lower inequality in the year of the boom. This effect then gradually diminishes over time until inequality returns to its pre-boom level in the long run.