Natural resource depletion and the resource curse

This thesis studies the relationship between natural resources and economic wealth, in two parts. Previous studies have found a negative relationship between natural resources and economic wealth, a phenomenon known as the curse of natural resources. Later studies reject the resource curse, in its simplest form, as their findings show a positive relationship when measuring economic wealth by GDP levels instead of growth. The argument is that the inclusion of initial GDP, when using GDP growth as measurement, will result in biased estimates due to the short time horizon. However, a third group of studies advocates the existence of a resource curse conditional upon institutional quality. In this case, resource endowment only affects the economic welfare negatively if the quality of institutions is sufficiently bad. In this thesis the measurement of economic wealth is further expanded. Taking into account that extraction of resources is a negative flow of the nation’s wealth gives a better understating of the change in welfare, and removes some of the positive bias of exploiting natural resources on economic wealth. An empirical analysis, utilizing data on a total of 263 countries in year 2000, is conducted to find whether the resource curse is still rejected when including depletion of natural resources to the analysis. None of the estimation methods or model specifications in this thesis are able to confirm the existence of a resource curse, and in its simplest form the rejection is supported. Also the conditional resource curse is rejected by the data material, meaning that countries with poor institutions do not seem to have a more negative, or less positive, impact of natural resources on GDP levels adjusted for depletion of natural resources than countries with good institutions. However, be aware of the limitations of the data, in particular the absence of a truly exogenous variable of resource endowment