Extractive Resources and Public Capital in Developing Countries: Does Public Private Partnership Matter?

This paper investigates the relationship between extractive resources and public capital in developing countries. We rely on the IMF public capital new database which distinguishes "full public provision" capital and Public-Private Partnership capital to assess the effect of extractive resources on public capital on a sample of 95 developing countries over the period 1996-2015 using instrumental variables method. The results show that extractive resource exerts a negative effect on full public provision public capital while its effect on public-private partnership capital is positive. These effects are robust regardless of the type of extractive resources considered. Nevertheless, the negative effect of mineral resources is lower compared to energy resources (gas, coal and oil). A focus on the African region shows that both the adverse effect of extractive resources on public capital and its positive effect on public-private partnership capital are stronger. These findings shed some light on the fact that rent-seeking behavior (political or economic) might motivate public investment spending in resource-rich countries. However, "tying the hands" between the private sector and the public sector in investment projects helps to scale-up public capital. The paper calls for a closer look at the scaling-up effect of natural resources on public investment in developing countries claimed in the literature specifically when institutions are weak.