Browsing by Author "Vänskä, Bettina"

In contrast to conventional economic growth theory, natural resource abundance can harm country's economic growth. This puzzling phenomenon is called resource curse. Resource curse is defined as a decrease in national income due to an increase of natural resources. In general, resource rich countries have had lower growth rates than their resource poor counterparts during last four decades. However, not all resource abundant countries perform poorly. There are also countries with large natural resources that have experienced fast economic growth. Recent studies have suggested that institutional quality could explain this divergence. By institutions it is referred for example to the level of corruption, rule of law and government accountability. This thesis examines whether institutional quality has any effect on resource curse and whether differences in institutional quality explain the divergence between well and poorly performing resource abundant countries. The problem is examined with two rent-seeking theories. The first one (Mehlum et al. 2006a) examines entrepreneurs' allocation between two competing activities: production and rent-seeking activity. The institutional quality of the country determines whether or not natural resources induce the entrepreneurs to participate in rent-seeking activity. The second theory (Robinson and Torvik 2013) differs from Mehlum et al. in the specialization possibility and functional forms used. It shows that the allocation decision of entrepreneurs and the aggregate income of the country are conditional on the institutional quality of the country. Both theories examine how entrepreneurs' allocation decision and national income respond to an increase in natural resources. Resource curse is shown to exist only in countries with poor institutions. In that case an increase in natural resources decreases national income because talents are transferred into rent-seeking activity. Strong institutions mitigate the entrepreneurs’ participation to rent-seeking activity. As more entrepreneurs are participating in production activity and incentives to participate in rent-seeking are mitigated, the national income is increased. Institutional quality determines whether a resource rich country suffers from resource curse. Institutions are shown to be essential in explaining the divergence of resource rich countries to well and poorly performing. Resource rich country can turn the curse over by improving its institutions. The results stress the importance of underlying institutions on economic performance.