233 - The pungent smell of “Red Herrings” Subsoil assets, rents, volatility and the resource curse

DNB Working Papers
Date 22 January 2010

Brunnschweiler and Bulte (2008) provide cross-country evidence that the resource curse is a “red herring” once one corrects for the endogeneity of natural resource exports and allows resource abundance to have an effect on growth. Their results show that resource exports are no longer significant while the value of subsoil assets has a significant positive effect on growth. But the measure of subsoil assets that has been used is based on World Bank estimates of natural capital, which are valued as proportional to current rents, and thus also endogenous. Furthermore, their results may suffer from omitted variables bias, weakness of the instruments, violation of exclusion restrictions and misspecification error. Correcting for these issues and instrumenting resource exports with values of proven reserves at the beginning of the sample period; there is no evidence for the resource curse either and subsoil assets are no longer significant. However, we provide evidence that resource dependence leads to more volatility and thus indirectly to worse growth prospects.

Keywords: resource curse, resource exports, resource rents, natural capital, subsoil assets, reserves, instrumental variables, volatility.

JEL Classification: C12, C21, C82, F43, O11, O41, Q32.