Natural resource dependence and the Dutch disease: Evidence from Sub-Saharan Africa

Abstract

The natural resource endowment in Sub-Saharan Africa (SSA) countries has not been reflected in the growth and development of these countries. Some of the main channels through which natural resource dependence may inhibit economic growth have been suggested to include the Dutch disease and the pull effect mechanisms. Dwelling on this background, we empirically test the validity of the Dutch disease and pull effect hypotheses in SSA by examining the effect of natural resource dependence on the growth of the manufacturing, services, and agricultural sectors, and the overall economy. For this purpose, we employ the system general methods of moments (GMM) approach on data from World Development Indicators from 2005 to 2019. Our findings divulge a detrimental impact of natural resource dependence on the growth of the non-natural resource sectors and the overall economy. We find empirical evidence confirming the validity of the Dutch disease and the pull effect mechanisms among SSA economies. We underscore the detrimental (favourable) effects of unemployment and external debt (institutional quality and foreign direct investment) on sectorial and overall economic growth. From this perspective, we recommend that resource-rich countries in SSA encourage innovation and diversification to reduce the dependence on natural resources whilst stimulating the growth of other sectors. Prudent financial management and the building of strong institutional structures are also encouraged to supplement the cessation of overexploitation of natural resources to stimulate economic growth.