Researcher / Policy Analyst | University of Cape Coast
Sub-Saharan Africa

Natural resource dependence and institutional quality: Evidence from Sub-Saharan Africa

Responsible Consumption and Production

This paper assessed whether natural resource-dependent countries have strong or weak institutional structures.

References

Journal article: Natural resource dependence and institutional quality: Evidence from Sub-Saharan Africa (2022)
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About:

This empirical data collection used a quantitative approach and hypothesis testing method.

The data for this research was collected from the world development indicators and world governance indicators of the World Bank. The five indicators for natural resource dependence used are the total natural resource rents, mineral rents, natural gas rents, coal rents, and oil rents. The quality of institutions was measured through six indicators: control of corruption, rule of law, regulatory quality, governance effectiveness, voice and accountability, and political stability.

We used data from 2005 to 2019 and employed a system dynamic GMM panel regression approach.

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Funding:

This research was independently conducted and did not receive funding from outside of the university.

Key points

  • Natural resource dependence exhibits a negative relationship with the quality of institutional structures. This implies that countries with abundant natural resources have poorer institutional structures.

Although Africa is a continent that is rich in natural resources, it has performed poorly in terms of economic growth and development. Governments in natural resource-abundant countries have more incentives to loosen the institutional structures that govern natural resources exploitation to aid the overexploitation of resource rents and use them for personal interests instead of the development of the country, in line with the rent-seeking theory.

Findings

  • Countries with a higher natural resource dependence have poor governance systems in terms of all the six measures of institutional quality.
  • Countries that are highly dependent on natural resources are politically instable, have poor rule of law and governance effectiveness, have a higher level of corruption and lower regulatory quality and accountability.
  • We argue that the negative relationship between natural resource dependence and institutional quality is caused by the desire of governments in natural resource-dependent countries to seek resource rents in order to win subsequent elections and discourage the diversification of the economy which may enhance the power of investors.
  • We also argue that governments of such countries tend to offer incentives to the citizens, to limit their desire to demand for increased accountability, for instance, by lowering taxes, offering public jobs, public goods, and transfer payments for political support during election periods.
  • In addition, other variables such as employment, education, and FDI improves institutional quality.

What it means

This research shows the need for resource-dependent countries to encourage the diversification of their economy. Governments of resource-dependent countries should try to limit the over-exploitation of natural resources and put proper structures in place so that resource rents can be efficiently utilized for economic growth and development.

For instance, certain loopholes in the laws governing natural resource extraction in Ghana allow the Minister to opt for sole sourcing that completely replaces competitive tendering when the minister believes sole sourcing is the best option. Such loopholes in governance must be tightened in order to limit the opportunity for politicians to overexploit natural resources for their personal interests.

How to use

  • The first step consists of accepting that the institutional systems in such countries are weak, making it easy for anyone to take advantage of their resources
  • Overexploitation of natural resources happens because some of the current laws give the opportunity for politicians to use natural resource revenues for their personal interests
  • The mindset of political leaders must also be changed
  • Other policies must also be put in place to make sure that economies are not dependent on natural resources
Special thanks to Smaranda Bob for preparation assistance

We would like to extend a special thank you to Smaranda Bob, for their invaluable contribution in assisting the preparation of this research summary.

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Asiamah, Oliver. 'Natural resource dependence and institutional quality: Evidence from Sub-Saharan Africa'. Acume. https://www.acume.org/r/natural-resource-dependence-and-institutional-quality-evidence-from-sub-saharan-africa/