Natural resources and institutional development

Recent work on the resource curse argues that the effect of resource wealth on development outcomes is a conditional one: resource-dependent countries with low-quality institutions are vulnerable to a resource curse, while resource-dependent countries with high-quality institutions are not. But extant models neglect the ways in which the inflow of resource revenue impacts the institutional environment itself. In this paper, I present a formal model to show that where domestic institutions do not limit state leaders’ discretion over policy prior to becoming fiscally reliant on resources, those leaders have little incentive in the wake of resource windfalls to establish institutional mechanisms that limit their discretion. Importantly, this shows that simple calls for domestic institutional reform are unlikely to be effective. Among other things, future prescriptions to mitigate the resource curse must focus on decreasing rulers’ fiscal reliance on resources.