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NATURAL RESOURCES AND POVERTY

Natural Resources and Poverty

“The Paradox of Plenty”

Abdelmoumine B. Traore

University of Tulsa

Author Note

Abdelmoumine B. Traore, Department of Economics, Student, University of Tulsa

Under the Supervision of Dr. Chad Settle and Dr. Matthew Hendricks,

Department of Economics, Professors, University of Tulsa

Correspondence concerning this article should be addressed to Abdelmoumine B. Traore,

Email: abb056@utulsa.edu
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Abstract

This study reveals that the abundance of natural resources by itself is neither a curse

nor a blessing for a country, but it is rather the high dependency of a country on natural resource

rents that can be detrimental. The research demonstrates that the main causes of poverty (the

curse) in mineral rich states are primarily institutional. Economic issues in natural resource rich

states are not automatic; they are the consequences of poorly-managed institutions. The random

effect method was used to estimate our econometric model. The resource curse estimate is

higher on the African continent by 14% compared to the rest of the world. Therefore, the model

suggests that African countries have poorer institutions compared to others. The high

dependency on natural resource rents has engendered bad management practices by leaders,

exacerbated by rent-seeking behaviors that create inequality, political instability, violence, and

corruption. All these factors are intertwined and affect mineral rich states’ economic life

including unemployment, inflation, and Dutch disease. The paper ends with a strategy to cope

with this natural resource paradoxical phenomenon. I propose to prioritize the institutional

component of the issue by reducing inequalities through population access to education and the

execution of an efficient tax system to fund social programs. Then, governments must choose

political systems that fit their culture and values. Finally, severe sanctions must be applied to

fight corruption, and natural resources’ financial transactions must be public for transparency.

Keywords: Natural resources, curse, economic, institutional, dependency, inequality, corruption,

policy, transparency, education, sanctions.

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Natural Resources and Poverty: “The Paradox of Plenty”

All over the world, government officials must regulate their countries’ economy with

intent to provide welfare to each of their citizens. Provision of welfare has often been associated

with a government’s objective of poverty reduction. Poverty is defined as the inability for an

individual to meet basic needs such as food, clothing, and shelter (Chambers, 2006). Intuitively,

one of the convenient ways for officials to reduce poverty is to use their available natural

resources. Hence, nations with abundant natural resources are believed to have a comparative

advantage in terms of economic development. However, it seems like many countries with

plenteous natural resources are today the last in the fight against poverty. This situation seems

even more pervasive on the African continent. In fact, countries that prohibit resource extraction

such as France, Germany, Scotland, South Africa, and Wales are the ones that are doing

economically well in their respective regions. In 1976, a prominent Venezuelan politician Pérez

Alfonzo gave a warning about what economists now call the natural resource curse saying, "Ten

years from now, twenty years from now, you will see, oil will bring us ruin... It is the devil's

excrement" (as cited in Karl,1997). In the face of these observations, many researchers have

conducted empirical studies to evaluate the relationship between poverty and natural resource

abundance. Indeed, scholars diverge on the factors leading to the phenomenon. Whereas some

of them believe that the problem is primarily economic, others argue that it is institutional or

political.

This paper extends the current research and aims first to confirm the existence of the

paradox of plenty by testing the hypothesis that there exists a positive relationship between the

rate of poverty and the level of dependence upon natural resource rents for a specific country. If

the hypothesis is true, the relative importance of the institutional factors against the economic
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factors contributing to the persistence of the phenomenon will be weighed; Next, the magnitude

of the resource curse in Africa compared to the rest of the world will be evaluated, and finally

policy implications to cope with the issue will be discussed.

Literature Review

Many explanations have been proposed to understand the resource curse phenomenon.

The problem can be understood from two perspectives: the economic approach and the

institutional (political) approach.

The Economic Perspective

The first economic explanation of the resource curse is related to the Dutch disease

phenomenon. Proponents of that explanation affirm that the economic expansion of the mineral

resource sector leads to the decline of the manufacturing and agricultural sector. Corden and

Neary (1982), Krugman (1987), Matsuyama (1992), Wijnbergen (1984), and Ismail (2010) find

that natural resource exports crowd out manufacturing exports; Sachs and Warner (2001) also

argue that Dutch disease is what causes their finding of slower growth in resource-abundant

countries. In most of the cross-country Dutch disease models, currency appreciation from

resource exports crowds out tradable manufacturing during natural resource booms (Sachs and

Warner, 2001). As Prebisch (1950) and Singer (1975) argue, primary commodity exporters

would suffer from a decline in terms of trade, which would widen the gap between the rich

industrialized states and the poor resource-exporting states. Even with a fixed exchange rate,

Dutch disease persists because of the increased labor demand due to the resource sector that

causes local wages to rise. According to Prebisch (1950), tradable goods manufacturers contract

as input costs rise relative to output prices, which deprives the economy of learning-by-doing

spillovers.
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The second argument advanced has to do with the volatility of natural resources.

Volatility has been shown to be bad for growth, investment, income distribution, poverty and

educational attainment (Ramey and Ramey, 1995; Aizenman and Marion, 1999). Natural

resource rents tend to be very volatile because the supply of natural resources exhibits low

price-elasticities of supply. Robinson and Thierry (2006) show in their model that volatility

from natural resource prices is the source of the curse. To illustrate, Rigobon and Hausmann

(2002) show in their paper that the standard deviation of oil price changes has been about 30 to

35 percent per year. For a country where oil represents about 20 percent of GDP, a 1 standard

deviation shock to the price of oil represents an income shock equivalent to 6 percent of GDP,

which is three times higher than the shock experienced by an industrial country (Rigobon and

Hausmann, 2002).

In addition, scholars advance that the resource curse phenomenon is linked to the

imperfections of the financial market. In their paper titled “Resource Curse or Debt Overhang?”,

Manzano and Rigobon (2011) show that the natural resource curse must be related to a debt

overhang; They argue that in the 70’s when commodity prices were high, natural resource

abundant countries used their resources as collateral for debt. In fact, according to Karl (1999),

not only does petroleum provide exceptionally high levels of rents over a long period of time,

but it also facilitates international borrowing, thereby perpetuating the capacity of resource-

abundant countries to live beyond their means. When the debt issue is considered, many

countries with a lot of natural resources are not resource -abundant anymore, since they use the

rents of their natural resources to pay for debts (Manzano and Rigobon, 2011).

Dutch disease, the volatility of natural resources, and the imperfections of the

financial market are economic issues that create difficulties for resource exporters. Yet, to
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explain why these hardships lead to persistently slow growth (the resource curse), we must also

explain why governments fail to take corrective action.

The Institutional Perspective

Van Wijnbergen and Neary (2004) concluded the following from their study on Dutch

disease: “In so far as one general conclusion can be drawn [from our collection of empirical

studies], it is that a country’s economic performance following a resource boom depends to a

considerable extent on the policy followed by its government” (Wijnbergen & Neary, 2004,

pg.10). This position is further supported by Ross (1999) which affirms that the resource curse

has political explanations at three levels: cognitive, societal, and state-centered.

The cognitive explanation to the resource curse is that resource wealth causes a type of

myopia among public or private actors. A significant work has been presented by Karl (1999) to

show this cognitive aspect of the “paradox of plenty”. She affirms that petro-states are virtually

heterogeneous in every respect except oil. However, what distinguishes them from other states,

above all else, is their addiction to oil rents. In fact, when this oil addiction takes hold, a skewed

set of both political and market incentives penetrate all aspects of life that almost anything is

eventually up for sale (Karl,1999). She continues by saying that not only does petroleum

provide exceptionally high levels of rents over a long period of time, but it also facilitates

international borrowing; thereby perpetuating the capacity of petro-states to live beyond their

means (Karl, 1997). Hence, present and future natural resource rents permit the leaders of petro-

states to avoid badly needed structural changes far longer than other developing countries,

which are reined in more quickly when their macroeconomic indicators show trouble

(Karl, 1999). Natural resource rents mask the economic issues encountered in mineral rich

countries; therefore, rents make business leaders, and politicians, blind.

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The societal approach to the paradox of plenty suggests that resource booms enhance

the political leverage of non-state actors who favor growth-impeding policies. Kolstad and Wiig

(2009) view the resource curse as a problem of certain rents leading to dysfunctional or

suboptimal behavior. They describe “impartiality enhancing institutions” which are defined as

institutions that reduce the possibility or attraction of favoritism versus acting in the public

interest. This concept hence subsumes the types of institutions deemed important to solve the

resource curse phenomenon. It cuts to the core of the key problems of political and private

capture of riches manifested in countries that fail to benefit from natural resources. The

decentralized models discussed by Kolstad and Wiig (2009) focus on the actions of individuals

outside the power elite (the society). These models are essentially rent-seeking models, where

individuals choose between using their effort, time, and talent on rent extracting activities.

According to Kolstad and Wiig (2009), an increase in natural resource rents has the effect to

increase the likelihood that others will challenge the government for power (rent seeking

behavior). Some researchers argue that resource wealth such as oil somehow makes societies

less entrepreneurial. There is so much wealth floating around the government that people find it

much more profitable to engage in unproductive rent-seeking activities to appropriate that

wealth rather than in creating more wealth. Those unproductive rent seeking activities are wars,

corruption, and so on. Moreover, the presence of common-pool problems or uncertainty over

property rights over the resource income as explained by Weingast, Shepsle and Johnsen

(1981), and Hagen and Harden (1994) may generate low growth by inefficiently focusing

economies in fighting over existing resources.

Finally, as Ross (1999) says: “If policy makers are rational and the behavior of societal

actors is held constant, it becomes difficult to explain why resource exporters should respond so
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poorly to their predicament. This may be why most state-centered explanations for the resource

curse are hybrids, using a mix of cognitive, societal arguments to explain how resource rents

might damage a state’s ability to promote economic growth” (Ross,1999, p.312).

Theories of the rentier state are by far the most common version of state-centered approaches,

while Shafer (1994) offers newer ones. Theories of the rentier state contend that when

governments gain most of their revenues from external sources, such as resource rents or

foreign assistance, they are freed from the need to levy domestic taxes and become less

accountable to the societies they govern. Shafer (1994) claims that it is the flexibility or

inflexibility of leading sectors that explains the resource curse. Shafer (1994) also indicates that

the flexibility or inflexibility of leading sectors is caused by the characteristics of the products

themselves: coffee farming requires little capital and has small economies of scale, thereby

producing flexible sectors; tea is more efficiently grown on large plantations, producing

inflexible leading sectors. He means that when an export sector has a small number of large

firms, high barriers to entry and exit, and greater asset-specificity—such as many minerals

industries—it will have greater difficulty coping with international market fluctuations and will

be more prone to seek government help. Since the small number of firms makes collective

action easier, these “inflexible” sectors tend to place exceptionally strong demands on the state

for protection during adverse market swings (Shafer, 1994). In return, politicians ask for

compensations from mineral industries during periods of boom for the service rendered to them

during period of fluctuations. Additionally, these compensations are often under the table.

The continent that is often at the center of debates about the resource curse

phenomenon is Africa. It is the continent where poverty has been skyrocketing for several

reasons (Alao, 2015). Many arguments have been advanced to explain why the phenomenon is
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exacerbated on the African continent; Many of the researchers blame institutions and mineral

corporations.

Xavier and Arvind (2008) argue natural resources such as oil and minerals may or

may not be a curse on balance. Their work focuses on Nigeria and shows that natural resources

are certainly detrimental for the quality of domestic institutions, which has an impact on long-

run growth. The Nigerian experience provides telling confirmation of this aspect of natural

resources. According to Xavier and Arvind (2008), waste and corruption from oil rather than

Dutch disease has been responsible for its poor long run economic performance. Xavier and

Arvind (2008) invite new officials to provide visionary leadership and implement economic

reforms such as prudent macroeconomic policy, privatization, trade liberalization, and

strengthening of the financial sector. Their proposal to the new leadership would be to focus on

one key issue: managing the revenues from oil.

Like Xavier and Arvind, Alao (2015) also blames the institutions in African countries

for the problems resulting from the exploitation of natural resources. He advances that “recent

conflicts over natural resources in Africa are inextricably linked to the complete defectiveness

or the selective efficiency of the apparatus of natural resource governance” (Alao, 2015). By

natural resource governance, he means the whole range of internal and external considerations,

especially in the form of laws and practices, which come to play in the management (the

ownership, extraction, processing, distribution, and control) of natural resources. Consequently,

contrary to conventional thinking, he believes that neither scarcity nor abundance is the real

cause of natural resource conflict; rather, it is the “management” of these resources.

Moreover, the inequality dimension of the resource curse in Africa is addressed by

Murombedzi (2016) who explains that inequality in Africa is exacerbated by mineral

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corporations. Murombedzi (2016) affirms that the use and control of natural resources has

historically generated inequality in Africa. Climate change and the responses to it have

aggravated these inequalities. The dominance of the market, representing corporate interests

over social and environmental interests is argued to be clearly socially, economically and

environmentally unsustainable (Murombedzi,2016). In the same vein, Soros (2007) affirms that

the major oil corporations operating in African countries have been implicated in or associated

with human rights violations, environmental pollution and degradation, escalation of poverty

conditions, and an increase in social vices in their host communities. Nigeria has earned

enormous amounts of money from oil production and export, yet it is one of the poorest

countries in the world (Soros,2007). Soros (2007) advances that corruption is pervasive in

Nigeria, and those living in oil-affected communities suffer from human rights abuses.

In addition to the increased inequality created by the mineral corporations in Africa,

Multinational Corporations (MNC) have also been accused of adopting a philosophy and

attitude with the African governments with which they do business that favors detachment from

the way states manage resources and corruption (Duruigo, 2005). According to the President of

Sao Tome, Fradique de Menezes, “[MNCs] are significant contributors to the malaise that

pervades African countries” ( Duruigbo, 2005, pg.31). Likewise, Soros (2007) affirms that

international mining and oil companies which seek to maximize profits find that they can lower

the costs of obtaining resources more easily by obtaining the resources at below market value

by bribing government officials than by figuring out how to extract the resources more

efficiently. In other cases, the natural resource is sold to domestic firms at below full value, with

government officials either getting a kickback or an ownership share (Soros,2007). In practice,

the risks of corruption in resource- rich environments are very large and the costs of such
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corruption to national economies are enormous (Soros,2007). According to the International

Monetary Fund, billions of dollars went missing from Nigeria's coffers between 1997 and 2002

(Duruigbo, 2005). To worsen matters, the government continues to take out loans backed by its

oil reserves, thereby further endangering its fiscal position. These loans generally have not been

used for the benefit of the country, but rather to enrich the country's political leaders; by some

accounts, Nigeria’s president Abacha was responsible for the theft of as much as 3 billion USD

(Duruigbo, 2005).

Researchers are increasingly convinced that the resource curse phenomenon is

primarily due to poor institutions. However, according to Ross (1999): “Unlike the economic

explanations, political [institutional] explanations for the resource curse are rarely tested, either

quantitatively or with well selected qualitative case studies. The absence of careful testing has

had two major consequences: scholars have been unable to produce a cumulative body of

knowledge about policy failures of resource exporters; and with no apparent need to place their

theories in testable form, their arguments are often left underspecified” (Ross, 1999, pg.309).

This paper will remedy these limitations by utilizing data on corruption, inequality, and

violence recently developed in the political science field, which are excellent proxies to measure

and weigh the role of institutions versus economic factors in the resource curse tragedy.

Empirical Analysis

The purpose of this paper is to estimate how natural resources affect countries’

poverty rates, with a focus on the African continent. Unlike current works in which only purely

economic factors are presented, the econometric model in this paper is a mix of institutional and

economic factors related to the resource curse phenomenon. In fact, in addition to the principal

variable (natural resources rents (% of GDP) per country), we included nine other explanatory
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variables that describe the trends of poverty rates, which allows to minimize bias of the

estimators as well.

The econometric model is the following:

Xit= X0it+β1*X1it+β2*X2it+β3*X3it+β4*X4it+β5*X5it+β6*X6it+β7*X7it+β8*AFRICAi*X1it+ β9t *

i.year+ β10*AFRICAi +Uit, Where Uit is the error term.

The description of the econometric model can be found in Table 1. The variables were tested for

multicollinearity (Table 2). All the variables have a variance inflation factor (VIF) less than 10

and the mean VIF is around 3 (Table 2); therefore, multicollinearity is not an issue in our

model. Three of the variables are institutional: the Gini coefficient, the corruption index, and the

political stability or absence of violence/Terrorism index; five of them are economic:

unemployment, inflation, trade openness, and natural resource rents in GDP and in USD. The

variable “natural resource rents in USD” allows to differentiate between natural resource

abundance and natural resource dependence. In fact, this model elucidates whether it is the

abundance of mineral resources or the dependence on mineral rents that leads to the resource

curse, which is not clear in the current literature. The last two variables are the dummies Africa

and i.year. Dummy Africa permits to evaluate the true magnitude of the resource curse on the

African continent which is not clear in the current studies since they are either too general or

qualitative (not empirical). Finally, i.year accounts for year effects to capture the influence of

aggregate time-series trends.

Data Description

Panel data was collected on 223 countries from 2000 to 2016. The panel is

unbalanced, and the time variable (year) has some gaps. The dataset includes the most recent

estimates from the World Bank. A summary of the dataset can be found in Table 3.
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The dependent variable is poverty rate (% of total population). It is the headcount ratio of the

number of people below the national poverty line in each country over time (World Bank,

2016). In fact, national poverty lines are the benchmark for estimating poverty indicators that

are consistent with the country's specific economic and social circumstances; they reflect local

perceptions of the level and composition of consumption or income needed to be non-poor for a

specific country.

There are many economic explanatory economic variables to explain poverty ( the

curse), such as total natural resource rents (% of GDP and in USD), inflation rate,

unemployment, and trade openness.

• Total natural resource rents (% of GDP and in USD) are the sum of oil rents,

natural gas rents, coal rents (hard and soft), mineral rents, and forest rents for a specific country

over time (World Bank, 2016). In some countries earnings from natural resources, especially

from fossil fuels and minerals, account for a sizable share of GDP, and much of these earnings

come in the form of economic rents. The dependency of a country on natural resource may have

an impact on the rate of poverty for that country.

• Next, inflation (annual %) measured by the consumer price index reflects the

annual percentage change in the cost to the average consumer of acquiring a basket of goods

and services that may be fixed or changed at specified time intervals. (World Bank, 2016). If the

price of goods in a country increases with time, individuals will have less buying power, and

might therefore live in poverty.

• Then, unemployment (% of total labor force) refers to the share of the labor force

that is without work but available for and seeking employment (World Bank, 2016). A high or

low rate of unemployment may explain poverty.

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• Afterwards, trade openness (% of GDP) is the sum of exports and imports of

goods and services measured as a share of gross domestic product (World Bank, 2016). Trade is

a key means to fight poverty by improving developing country access to markets, and

supporting a rule-based, predictable trading system.

There are also many institutional variables which explain the curse, such as the

corruption index, the Gini coefficient, political stability, and absence of violence/terrorism

index.

• The corruption perception index ranks countries and territories on a scale of 0 –

100 based on how corrupt their public sector is perceived to be (World Bank, 2016). A country

or territory’s score indicates the perceived level of public sector corruption, where 0 means that

a country is perceived as highly corrupt and 100 means it is perceived as very clean.

• Then, the Gini coefficient measures the extent to which the distribution of income

or consumption expenditure among individuals or households within an economy deviates from

a perfectly equal distribution (World Bank, 2016). Thus, a Gini index of 0 represents perfect

equality, while an index of 100 implies perfect inequality.

• Finally, political stability and absence of violence/terrorism index measures

perception of the likelihood of political instability and/or politically-motivated violence,

including terrorism (World Bank, 2016). Estimates give the country's score in units of a

standard normal distribution, i.e. ranging from low instability rated at -2.5 to high at 2.5.

Methodology

Three methods were used to estimate the coefficients of the variables in our

regression. The first one is the pooled OLS (OLS) method. This method consists in simply

using OLS on the entire sample of countries and years by pooling all the countries and years
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into one regression. The assumptions with this method are that each variable needs to be

uncorrelated with the error term. In fact, since the error term has two components, all variables

need to be uncorrelated both with the idiosyncratic component and the fixed effect part of the

error term. We included the “cluster” option in Stata to correct for serial correlation, which can

otherwise give incorrect standard errors. However, the results from this regression are likely to

be biased and inconsistent since this regression does not include many variables that are

constant over time such as culture, geography, and population IQ. The variables in that

regression will therefore be correlated with the fixed effect of the error term. To avoid bias and

inconsistency of the estimates, we used the following methods: the fixed effect method and the

random effect technique.

The fixed effect method eliminates the time invariant component of the error term

and variables. It involves calculating the mean of the variables over time and subtracting from

the actual value of the dependent variables. By eliminating the fixed effect component of the

error term, if the time- variant variables are uncorrelated with the idiosyncratic component of

the error term at all times (strict exogeneity), the estimators obtained will be consistent. For this

method, the standard deviations have been corrected using the “cluster (id)” option because of

serial correlation and heteroskedasticity. However, this method deletes the time-invariant

variables from the regression. The econometric model has a dummy variable (Africa) that is

time invariant, therefore this model will not be able to estimate the coefficient of the dummy

variable Africa. The random effect technique allows to remedy for this weakness of the FE

method under certain conditions.

The rationale behind a random effect model is that, unlike a fixed effect model,

the variation across entities is assumed to be random and uncorrelated with the predictor or
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independent variables included in the model (Greene,2008). If differences across entities have

some influence on the dependent variable, then random effect method should be used. An

advantage of the random effect technique is that it includes time invariant variables (i.e. gender)

in the regression. In the fixed effects model these variables are absorbed by the intercept. The

random effect method will be chosen over the fixed effect method if it passes the Hausman test

in the result section.

Results and discussion

The results of the econometric model are given in Table 3. The results from the

Pooled OLS are likely to be biased and inconsistent because the model does not include enough

variables that are time invariant. Also, there are many time invariant variables in the fixed effect

component of the error term that can affect poverty and can be correlated to the variables in the

model. Therefore, the estimates from this method can be rejected. All that is now left to

determine is the best alternative between the fixed effect method and the random effect

technique. This will be done by using the results of the Hausman test (Table 5). Under the

Hausman test, I failed to reject the null hypothesis H0 since Prob>chi2 is greater than .05;

therefore, both methods could be used. However, the method used is the random effect

technique since it gives estimates for the time-invariant variable Africa.

The interpretation of this econometric model will be based on the estimates of the

random effect method as said above. Interpretation of the coefficients is tricky since they

include both the within-country and between-country effects. The coefficients represent the

average effect of the independent variables over the dependent variable when the independent

variables change across time and between countries by one unit.

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Concerning the insignificant economic variables, inflation and trade openness are

statically insignificant at the 90% confidence level and above (Table 4). Since those variables

are insignificant, we can at least interpret the signs of the coefficients. The model shows that

there is a positive correlation between the level of inflation and the rate of poverty for a specific

country (Table 4). Inflation means a general increase in the price of goods, and a fall in the

purchasing power of currency. In fact, the sign of the variable makes sense intuitively because

when goods become more expensive, the population becomes poorer. People have less income

because of the rise in prices. About the trade openness variable, the regression shows that there

is a negative correlation between the openness to trade of a country and the rate of poverty of

that country (Table 4). The sign is also realistic because the more open a country is to trade, that

country benefits from technology transfers, from knowledge, and has access to a larger financial

market, which overall can reduce poverty.

As to the significant economic variables, unemployment and natural resources rents

(% GDP and USD) are respectively significant at the 90%, and 99% confidence level (Table 4).

The econometric model reveals that there is a positive correlation between the poverty rate in a

specific country and the level of unemployment in that country. If the level of unemployment

rises by 10%, poverty increases by 1.8% (Table 4). Regarding the variable “natural resource

rents”, the model reveals that there is a positive correlation between natural resource rents (%

GDP) and poverty rate. For a specific country, if the proportion of natural resource rents in the

GDP increases by 10%, that country experiences on average a rise in poverty of 1.4 % (Table

4). The higher the proportion of natural resource rents in the GDP, the more dependent is that

country from natural resources for its development; hence, the poorer is that country.
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In contrast, when natural resources rents are simply evaluated in USD there is a

negligible negative correlation with poverty rate. In fact, the coefficient of mineral rents (USD)

is 3.5*10^-5, which suggests that the amount of natural resource in a country does not virtually

affect its rate of poverty (Table 4). That variable can even be dropped from the econometric

model. This result is crucial in that it reveals that it is not the abundance of natural resources

which affects the rate of poverty of a country, but rather the dependency of that country on

natural resource rents. For example, when the United States is compared with Nigeria, the two

countries receive a high amount of natural resource rents in US$, but since the share of natural

resource rents in the GDP of Nigeria is quite large compared to the United States, Nigeria

experiences a much higher rate of poverty compared to the United States (Duruigbo, 2005).

Regarding the institutional factors, they are all statically significant at the 99%

confidence level (Table 4). Corruption index in the econometric model shows that there is a

negative correlation between poverty rate and corruption. This result is realistic in that the

higher the corruption index, the cleaner is the country, which ultimately decreases the poverty

rate. An increase in the corruption index by 10% decreases poverty by 1.75%, ceteris paribus

(Table 4). In fact, when a country is corrupted, money that is granted for social programs to

relieve people from poverty is not used efficiently, which makes the population poorer.

The next factor is the Gini coefficient. There is a positive relationship between inequality and

poverty. The coefficient in the model shows that an increase in inequality by 10 % raises

poverty by 6.8 % ceteris paribus (Table 4). The result is intuitive because when inequality rises,

a minority of people have all the privileges, while most people are living in poverty.

The last institutional factor related to political Stability and Absence of Violence/Terrorism

reveals there is a negative relationship between poverty rate and the index characterizing the
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political stability for a specific country. If the level of political stability decreases by an index of

1 in a specific country, the poverty rate increases by 2.4% ceteris paribus (Table 4). The result

is accurate since political instability slows the economic activities in a country, which makes

people live in misery.

Regarding the dummy variable Africa, the coefficient of this time invariant variable

is positive, which shows that the rate of poverty on the African continent is higher on average

compared to the rest of the world. There is a 14% difference between the poverty rate in Africa

and the rest of the world. That means that the magnitude of the factors causing poverty

(the resource curse) are 14 % higher on the African continent compared to others. It reveals that

the African countries are on average 14% more natural resource dependent and politically

unstable; Africa has 14% less trade openness and 14 % more inequality, corruption,

unemployment, inflation. Faced with this situation, a plan of actions need to be undertaken to

fight poverty in the world with a focus on the African continent.

From the above discussion, most of the economic variables appear to be insignificant

when put in the econometric model together with institutional indexes. The only significant

economic factors are the level of unemployment, and the level of dependency of a country upon

natural resource rents; The institutional variables are all significant at the 99% confidence level.

It shows that the resource curse phenomenon is more institutional than economic. Economic

issues are therefore the results of the bad institutions in oil states countries. Institutions that are

corrupted, unequal, and politically stable encourages mineral states to be highly dependent upon

natural resources. This dependency creates unemployment because the manufacturing and

service sector is crowded out by the heavy mineral industry.

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Policy implications to fight poverty

Poverty is a global phenomenon, but is severe on the African continent (Duruigbo,

2005). Based on the econometric model presented in this paper, the following strategy can help

reduce poverty considerably. The strategy consists basically in focusing on the statically

significant variables by order of magnitude of their coefficients.

First, inequality must be reduced. Inequality is the cause of poverty that has the

highest magnitude in the model. An increase in inequality of 10 % leads to a rise in poverty of

6.8% on average in a specific country, ceteris paribus (Table 4). Government officials can

reduce all sorts of inequality in the different sectors of their economy by giving for example

access to education to their population, and execute an efficient tax system to fund social

programs. An efficient tax system will be one that is not constraining for rich and middle-class

people, and that does not encourage poor people to live on social aids all their life. For example,

across Africa 28 million girls between the ages of about 6 and 15 are not in school and many

will never even set foot in a classroom (Duruigbo, 2005). This situation of inequality makes the

African continent lose his human potential, which can be a cause of the severe poverty on the

continent.

Then, political stability must be prioritized by governments. When the level of

political stability decreases by an index of 1 in a specific country, the poverty rate of that

country increases by 2.4% ceteris paribus (Table 4). This result shows that governments must

put effort into having a climate of peace in their respective nations. If a country experiences a

lot of violence, it increases the risks of investment, which discourages foreign investment as

well national investment. Low investment in the country engenders unemployment and

therefore poverty. To reduce political instability, countries must choose political systems that fit
 21
NATURAL RESOURCES AND POVERTY

their culture and values. Countries should not be imposed a model. For example, Lybia was

more politically stable under the dictatorship model of Muammar Khadafi than the democratic

model that the country is currently following. Today, Lybia is the center of terrorism and is a

threat for the world (Murombdezi, 2016).

Afterwards, corruption must be fought. A 10% increase in corruption reduces poverty

by 1.75 % on average in a specific country, ceteris paribus (Table 4). Governments can fight

corruption by being transparent in all their activities, use technology to digitize administrative

procedures involving financial transactions, and apply a strict legislation to reprimand severely

both the bribe-taker and the bribe-giver. Corruption undermines economic activities, and does

not encourage foreign investment. It makes governments lose a substantial amount of fund that

could have been used to fund social programs to lift people out of poverty. For example, Africa

is losing more than 50 billion USD every year in illicit financial outflows as governments and

multinational companies engage in fraudulent schemes aimed at avoiding tax payments to some

of the world’s poorest countries, impeding development projects and denying poor people

access to crucial services (Duruigbo, 2005).

Moreover, the reliance on natural resources rents must be reduced. For a specific

country if the proportion of natural resource rents in the GDP increases by 10%, that country

may experience on average an increase in poverty of 1.4 % ceteris paribus (Table 4). To reduce

the country dependence on natural resources, governments can use their natural resource rents

to invest in manufacturing industries, and financial services. Manufacturing sector accounts for

only 12% of Africa GDP (Humphrey et al, 2007). The manufacturing and financial sector will

also increase the trade openness, which can help fight poverty by improving African country

access to international markets. A higher dependence on natural resource rents is the cause of
 22
NATURAL RESOURCES AND POVERTY

unemployment, conflicts, and increased corruption on the African continent. Hence reducing the

reliance on natural resource will considerably reduce poverty in Africa, and globally overall.

Finally, the reduction of unemployment. A 10% increase in unemployment rises

poverty by 1.8% on average in a specific country, ceteris paribus (Table 4). Governments can

reduce corruption by encouraging youth to entrepreneurship. Facilitate access to loans for

people that are willing to create their own businesses. In Africa, the unemployment issue is

exacerbated because most people want government jobs (Duiruigbo, 2005). The private sector is

still informal and according to the African development Bank, the private sector accounts only

for 10% of total permanent jobs on the continent, which is quite low (Duruigbo,2005). When

there are not enough jobs, the youth considers illegal activities, which leads to violence, wars

and political stability in the country. Governments can reduce unemployment by diversifying

their economies by using their naturals resource rents to develop manufacturing and agriculture.

In sum, the strategy consists in correcting first the institutions by decreasing inequality,

corruption, rent seeking behaviors, and better managements of rents. Then the diversification of

the economy to create more jobs in other sectors of the economy.

Conclusion

The goal of this empirical study is to analyze the relationship between natural resources

and poverty with a focus on the African continent. The study reveals that the abundance of natural

resources by itself is neither a curse nor a blessing for a country. It is rather the high dependency

of a country upon natural resource rents that is detrimental. In fact, the study shows that a 10%

increase in the share of natural resource rents in a country’s GDP increases that country’s poverty

rate by 1.4%. Governments must manage their economies to be the least dependent on natural

resources rents. The study also demonstrates that the main causes of poverty in mineral rich
 23
NATURAL RESOURCES AND POVERTY

countries are primarily institutional. Poorly managed institutions create inequality, political

instability, violence, and corruption. Economic issues are not automatic; they are the

consequences of poorly-managed institutions. The resource curse is exacerbated on the African

continent by 14% compared to the rest of the world; this suggests that African countries have

poorer institutions compared to the rest of the world. The high dependency on natural resource

rents and unemployment are the consequences of bad management practices by leaders, and

individuals’ rent seeking behavior.

As discussed in the policy implication section, if governments, more precisely the

African nations, want to put an end to the curse resulting from the utilization of their resources,

they need to reduce inequalities by giving their populations access to education and by finding an

efficient tax system to fund social programs; The efficient tax system will not only help poor

people, but it will also discourage multinational companies to corrupt officials to avoid taxes; the

youth must be educated to be entrepreneurs, and not rent seekers. Governments must choose

political systems that fit with their culture and values in order to maintain political stability.

Finally, corruption must be severely reprimanded and natural resource financial transactions must

be public and transparent. Corruption fight will help governments make considerable savings to

pay for debts, and help to diversify mineral -states’ economies. In fact, to solve economic issues

such as unemployment, governments must reduce their reliance upon resource rents by

diversifying their economy through investment in agriculture, manufacturing, and the service

sector.
 24
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Appendix

Table 1
Description of the Variables in the Econometric Model

Variable Name Description

i Country code
t Year (2000-2016)
X Poverty Headcount Ratio at National Poverty Line (% tot. Pop)
X0 Constant Variable
X1 Natural resources rents (%GDP)
X2 Corruption Index (0-100)
X3 Gini Coefficient (0-100)
X4 Political Stability and Absence of violence/Terrorism (Low -2.5 to High 2.5)
X5 Inflation, consumer Prices (%GDP)
X6 Unemployment (% of total labor force)
X7 Trade Openness (% GDP)
AFRICA Dummy variable that specifies with 1 if the country is African, and 0 if not
GDP Gross Domestic Product
GDP*X1 Interaction between GDP and rents/GDP. (USD Rents)
i. year Year dummy variables

Note: X’s are the representation of the variables in the econometric model
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Table 2

Test for multicollinearity (Variation Inflation Factor)

Variable VIF 1/VIF

Rents (%GDP) 1.31 0.77
Gini 9.5 0.084
Rents ($USD) 1.06 0.95
corruption index 8.87 0.11
inflation 2.22 0.45
political stability 2.22 0.45
trade openness 4.52 0.22
unemployment 3.55 0.28
Africa 1.25 0.8
year |
2008 2.08 0.48
2009 2.1 0.48
2010 2.03 0.49
2011 2.13 0.47
2012 2.16 0.46
2013 1.58 0.63
2014 1.4 0.71
Mean 3.00 0.33

Note: When the VIF is less than 10, multicollinearity is not an issue.
 29
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Table 3

Data Characteristics

Variables Observations Mean Sd Min Max

Poverty rate 582.00 21.49 15.31 0.60 75.30

Resource rents (%GDP) 1655.00 9.65 18.47 0.00 327.93

Corruption index 2398.00 41.90 21.54 4.00 100.00

Gini Coefficient 505.00 38.17 9.07 23.72 63.38

Political stability 2056.00 -0.01 1.00 -3.32 1.93

Inflation Rate 2903.00 15.69 453.85 -35.84 24411.03

Unemployment 3026.00 9.09 6.46 0.10 37.60

Trade openness (%GDP) 2907.00 92.70 60.37 0.17 860.80

Rents (BILLION US$)
1652.00 6442.50 52433.53 0.00 687757.80
(GDP*Resource rents in %GDP)
3579.00 0.23 0.42 0.00 1.00
AFRICA

Note: the table is exported from STATA.

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Table 4

Regression Results

FIXED EFFECT RANDOM EFFECT

VARIABLES OLS Poverty rate
Poverty rate Poverty rate
Natural resource 0.118*** 0.347** 0.146***
Rents (%GDP) (-0.0423) (-0.142) (-0.0463)
-0.212*** -0.0904 -0.175***
Corruption index
(-0.0749) (-0.0592) (-0.0485)
0.802*** 0.618*** 0.687***
Gini Coefficient
(-0.214) (-0.233) (-0.158)
-1.464 -1.867* -2.419***
Political stability
(-2.174) (-0.986) (-0.911)
-0.216* 0.057 0.0459
Inflation rate
(-0.117) (-0.0566) (-0.0494)
-0.0396 0.299** 0.182*
unemployment
(-0.244) (-0.124) (-0.0977)
0.0235 -0.00309 -0.00104
Trade openess
(-0.0244) (-0.0416) (-0.0233)
-3.35e-05*** -0.000185*** -3.49e-05***
Rents (US$)
(-0.0000123) (-0.0000588) (-0.0000093)
0.27 -1.148** -1.111**
2008.year
(-1.274) (-0.494) (-0.489)
-2.884* -1.573** -1.760***
2009.year
(-1.478) (-0.722) (-0.676)
1.309 -2.080*** -1.912***
2010.year
(-1.677) (-0.664) (-0.663)
0.151 -3.007*** -2.739***
2011.year
(-1.351) (-0.789) (-0.772)
-1.031 -3.191*** -2.866***
2012.year
(-1.672) (-0.939) (-0.891)
-1.589 -4.782*** -4.513***
2013.year
(-2.081) (-1.162) (-1.197)
-1.021 -6.465*** -6.061***
2014.year
(-2.826) (-1.437) (-1.396)
15.44*** - 14.00***
Africa
(-3.753) (-3.65)
-0.566 1.507 4.235
Constant
(-8.976) (-8.466) (-6.753)

Observations 334 334 334

R-squared 0.589 0.556 0.559

Note: Robust standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1
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Table 5

Hausman Test Results

Note: the random effect method is preferred over the fixed effect method when Prob>chi2 is

greater than .05; we failed to reject the null hypothesis H0