Do Natural Resources Help or Hinder Development? Resource Abundance, Dependence, and the Role of Institutions

Abstract The resource curse literature presents conflicting evidence on the relationship between natural resources and development. We evaluate the direct effect of resources on developmental outcomes vis-a-vis their indirect effect through the weakening of political institutions using a 3SLS instrumental variable setup that simultaneously estimates development outcomes and institutions. We find that resource abundance and resource dependence affect development outcomes through different channels. While resource abundance generally has a direct positive effect on developmental outcomes, resource dependence has a stronger negative indirect effect that operates through its negative impact on institutional quality. The results also depend on the type of development outcome considered, with more consistent positive direct effects found for physical capital measures and stronger negative indirect effects for human capital development. The use of a simultaneous framework and dual measures of resources reconciles seemingly contradictory findings in earlier work.