Finding explanations for weak economic complexity in resource-rich African countries: Exploring the role of natural resource endowment and institutional quality

Abstract

Unlike earlier studies, this study explores the role of institutional quality in modifying the impact of natural resource wealth on economic complexity in resource-rich African countries. It also investigates the thresholds of institutional quality in the relationship between natural resource wealth and economic complexity from 1995 to 2021. This study employs fully modified least squares, robust standard error Driscoll-Kraay regression, dynamic common correlated effects, the method of moments quantile regression, and the dynamic panel threshold approach to achieve these objectives. The findings from all estimators indicate that both natural resource wealth and institutional quality independently contribute to improving the economic complexity of resource-rich African countries. However, the interaction between natural resource wealth and institutional quality impedes economic complexity. This finding suggests that institutional quality creates inadequacies that promote negative behaviour, such as racketeering, political interference, corruption, and opportunism, in natural resource wealth management. This phenomenon hampers and undermines the efficient allocation of resource incomes to economic complexity in resource-rich African countries. The study identifies an institutional quality threshold of 5.59 on a scale of 10, above which natural resource wealth strongly stimulates economic complexity. However, most resource-rich African countries fall below this threshold. Therefore, the study concludes that institutions weaken the positive effects of natural resource wealth on economic complexity in resource-rich African countries.