Natural resources and fiscal performance: Does good governance matter?

Abstract

Weighing the current world affairs, there seems to be strong association between natural resources, corruption, and bad economic performance. We empirically investigate the interplay between different institutional qualities and fiscal policy, and their effect on resource-abundant economies’ growth. In particular, the study contributes to the existing literature by disentangling the indirect effect of institutions on growth through the “quality of fiscal performance” transmission channel. Using yearly panel data on 79 resource and non-resource countries for the period 1984–2008, we find that the quality of fiscal policy – and not the quantity (government size) – matters to growth in the group of resource-rich countries. We also find that not all types of socio-economic and political institutions impact growth in the same manner. Better governance, stronger democratic institutions, and transparent budgets improve fiscal performance, leading to higher growth rates. Democratic and budget institutions seem to be in effect only through the fiscal channel but not independently.