Navigating the resource curse: Unraveling the role of governance in regional development in China

Abstract

This paper examines the counterproductive effects of natural resources on subnational economic development, known as the “Dutch disease”, and explores its implications. Using descriptive and empirical analysis, we investigate this phenomenon using panel data from 24 Chinese provinces from 2004 to 2021. Our research distinguishes between two types of entities: “grabbers” and “producers”. The former refers to resource wastage, while the latter represents modern, technologically advanced entities that utilize resources efficiently. To study the impact of the Dutch disease on China's regional economy, we modify certain variables accordingly. We also test the nonlinearity in the behavior of grabbers and producer regions. The initial output level reveals convergence of the tested model. However, the findings reveal a significant negative relationship between natural resource endowment and per capita gross regional income at the provincial level. However, when considering governance indicators, it is observed that the natural resource curse diminishes in the presence of a higher institutional quality index. The resource curse is such a strong element in resource-abundant regions that it can undermine the impact of other economic factors, such as investment and trade openness. These results suggest that stronger institutional elements can transform the resource curse phenomenon into a blessing, thereby enhancing regional productivity. The results also imply that the possible technology growth can help reduce the resource curse.