ABSTRACT

We consider the effect of natural resources on growth using a two-sector model (resource and nonresource). Government taxes the nonresource sector and chooses institutional quality, which determines productivity in the nonresource sector and the government's ability to appropriate resource rents. We find that resource booms harm institutions. Their effect on growth depends on relative sector sizes: when rents are more substantial, governments are likelier to corrupt institutions to secure larger shares of rents. Cross-country panel data substantiate the results: countries in the bottom tercile of value added in manufacturing and services divided by GDP are cursed by resources; others are blessed.