Countries with a higher natural resource dependence have poor governance systems in terms of all the six measures of institutional quality.
Natural resource dependence and institutional quality: Evidence from Sub-Saharan Africa
Oliver Asiamah
(He/Him)
Verified academic
Researcher
Faculty of Economics, Business & Management
University of Cape Coast
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.
About
This paper assessed whether natural resource-dependent countries have strong or weak 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.
Key Findings
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.
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. So the starting point is to revise these laws and build strong institutions to make sure these laws are interpreted and implemented successfully.
The mindset of political leaders must also be changed. They have to understand that natural resources have to be used for the development of the country. Only then can we successfully implement better policies.
Other policies must also be put in place to make sure that economies are not dependent on natural resources. Encouraging the diversification of the economy will ease the growth of other sectors as well with a positive impact on the growth and development of the overall economy .
<!– [if supportFields]>Â BIBLIOGRAPHY <![endif]–>Asiamah, O., Agyei, S. K., Bossman, A., Agyei, E. A., Asucam, J., & Arku-Asare, M. (2022). Natural resource dependence and institutional quality: Evidence from Sub-Saharan Africa. Resource Policy, 79, n.d. doi:https://doi.org/10.1016/j.resourpol.2022.102967
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About this research
This journal article was part of a collaborative effort
Samuel Kwaku Agyei
Ahmed Bossman
Ellen Animah Agyei
Joseph Asucam
Michael Arku-Asare
This research was independently conducted and did not receive funding from outside of the university.
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UN Sustainable Development Goals
This research contributes to the following SDGs
About this research
This research was independently conducted and did not receive funding from outside of the university.
This paper was co-authored
Samuel Kwaku Agyei
Ahmed Bossman
Ellen Animah Agyei
Joseph Asucam
Michael Arku-Asare
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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.
Methodology
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.
Glossary
Rent-Seeking Behavior
Incumbent leaders may seek to achieve higher resource rents during their tenure of office to spend it in a manner that enables them to win subsequent elections rather than using the resource revenue to fund productive activities. This behavior practiced by
political leaders divert their attention from investing in entrepreneurial
ventures to the utilization of political powers to seek benefits from the
resource rents.
Let your research make a social impact
Smaranda Bob prepared this research following an interview with Oliver Asiamah.
