Private sector accountability
The resource curse: which institutions matter?
The resource curse: do public or private sector institutions matter most?
Authors:
Ivar Kolstad
Publisher:
Chr. Michelsen Institute, Norway, 2007
Countries rich in natural resources on average grow more slowly than countries without such
resources, a phenomenon often referred to “the resource curse”. Following many studies, the problem has increasingly come to be identified with poor institutions, yet there is no consensus as to whether public or private institutions matter most. Using empirical analysis, this paper evaluates the two dominant institutional approaches to the resource curse in order to answer this question.
The first model considered studies the selection of entrepreneurs into rent-seeking versus productive activities. The second type analyses the use of patronage by politicians seeking re-election. The two models have quite different policy implications: while the first model suggests that institutions governing the private sector ought to be improved, the second that institutions governing the public sector should be emphasised.
This paper notes that there have been no studies testing the competing hypotheses against each other and seeks to address this problem. Using a data set including indices of institutions of both private sector governance and public sector accountability, it seeks tests which type of institutions matter most for the resource curse.
Based on this empirical analysis, the paper concludes that only improved private sector institutions ameliorate the resource curse, supporting the rent-seeking models. It therefore recommends that policy makers and donors in poor resource rich institutions should prioritise the development of institutions governing the private sector over public sector institutions. The paper also suggests that future research should study more closely exactly how private sector institutions matter, and which of these institutions are essential.
