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The!resource!curse!regarding!energy!
wealth!and!quality!of!institutions!
Does%the%relationship%between%institutions%and%fossil%fuel%abundance%affect%a% country’s%economic%performance?! ! ! ! ! ! ! ! ! ! ! ! ! ! ! Bo!Kaffener! s4085523! Supervisor!Ms!M.G.!Contreras! Radboud!University!School!of!Management! Master!Financial!Economics! Master!Thesis!2015/2016! 7!December!2016!%
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Abstract%
The!use!of!energy!has!increased!with!a!factor!of!16!in!the!last!century.!Therefore,!one!can! assume!that!countries!abundant!in!fossil!fuels!will!experience!high!GDP!growth.!This!thesis! considers!countries!abundant!in!fossil!fuels!energy!wealthy!countries.!However,!many! resource!rich!countries!fail!to!grow!more!rapidly!than!resource!poor!countries.!Some! countries!experience!being!resource!rich!as!a!blessing!(i.e.!Norway)!while!others!experience! being!resource!rich!as!a!curse!(i.e.!Venezuela).!Hence!there!has!to!be!another!factor!that! influences!the!relationship!between!fossil!fuel!abundance!and!economic!performance.!This! factor!is!assumed!to!be!institutional!quality.!Institutional!quality!can!be!divided!in!low!quality! grabber!friendly!institutions!and!high!quality!producer!friendly!institutions.!The!hypothesis! of!this!thesis!is!that!if!a!country!has!grabber!friendly!institutions,!then!being!energy!wealthy! will!negatively!influence!a!country’s!economic!performance.!This!hypothesis!is!rejected! because!of!robustness.!! !%
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! Abstract% __________________________________________________________________% 2! Index%_____________________________________________________________________% 3! Introduction%_______________________________________________________________% 5! Literature%Review%___________________________________________________________% 8! Model%___________________________________________________________________% 16! Data%and%Methodology% _____________________________________________________% 19! Key!Variables!_____________________________________________________________________!19! Dependent'Variables' ____________________________________________________________'19! GDP'per'capita'growth'___________________________________________________________'19! Independent'Variables'___________________________________________________________'20! Fossil'fuel'abundance'____________________________________________________________'20! Institutional'quality' _____________________________________________________________'21! Interaction'term''________________________________________________________________'24! Control'Variables' _______________________________________________________________'25! Initial'income'level'______________________________________________________________'25! Openness' _____________________________________________________________________'25! Investment' ____________________________________________________________________'27! Landlocked'____________________________________________________________________'28! Savings'_______________________________________________________________________'28! Inflation' ______________________________________________________________________'30! Summary!Statistics!________________________________________________________________!31! Sample'size'____________________________________________________________________'31! Descriptive'statistics'_____________________________________________________________'33! Missing'values,'Outliers,'Normality'and'Multicollinearity'________________________________'37! Results%and%Analysis%________________________________________________________% 38! Structure!of!analyses! ______________________________________________________________!38! Analysis!including!all!observations!(with!outliers)!________________________________________!39! Robustness'tests'________________________________________________________________'40!Analysis!without!the!United!States! ___________________________________________________!41! Robustness'tests'________________________________________________________________'42! Analysis!without!outliers! ___________________________________________________________!42! Robustness'tests'________________________________________________________________'43! Conclusion,%Discussion%and%Suggestions%________________________________________% 44! References% _______________________________________________________________% 48! Appendix%_________________________________________________________________% 54! Variables!legend!__________________________________________________________________!55! Corruption!scores!_________________________________________________________________!57! Missing!values!____________________________________________________________________!58! Outliers!_________________________________________________________________________!60! Outliers!box!plots!_________________________________________________________________!62! Normal!distribution! _______________________________________________________________!69! Correlations!______________________________________________________________________!73! Regressions!______________________________________________________________________!76! Do_file!__________________________________________________________________________!83! !
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Introduction%
Many!countries!with!natural!resource!abundance!fail!to!grow!more!rapidly!than!countries! that! do! not! have! these! resources! (Frankel,! 2010).! On! average! countries! with! natural! resource! abundance! experience! even! slower! economic! growth! than! those! without! these! resources!(Mehlum,!Moene!&!Torvik,!2006).!One!of!these!natural!resources!are!fossil!fuels.! The!use!of!energy,!for!which!fossil!fuels!are!used,!has!increased!with!a!factor!of!16!in!the!last! century! (Arrow! et! al.,! 2004).! One! could! assume! that! there! is! an! enormous! worldwide! demand!for!these!fossil!fuels!in!order!to!provide!enough!energy.!However,!countries!that! focus!all!their!attention!on!these!fossil!fuels!could!experience!a!resource!curse!(Mehlum!et! al.,!2006).!Some!countries!experience!being!resource!rich!as!a!blessing!(i.e.!Norway),!others! experience! their! abundance! as! a! curse! (i.e.! Venezuela).! Hence,! there! has! to! be! another! factor! that! effects! this! differing! impact.! One! of! the! differences! between! Norway! and! Venezuela!is!their!institutional!quality.!Therefore,!this!thesis!researches!whether!a!country’s! institutional! quality! in! combination! with! fossil! fuel! abundance! affects! its! economic! performance.!!
Being!fossil!fuel!abundant!can!be!a!curse.!The!country!that!experiences!a!resource! curse!could!possibly!profit!from!their!natural!resources!but!in!fact!they!suffer!from!it.!The! suffering! derives! from! the! neglecting! of! other! industries! because! of! the! focus! on! the! abundance! of! non_renewal! natural! resources.! Since! the! country! has! a! lot! of! this! one! resource,!the!curse!is!also!called!‘the!paradox!of!plenty’!(Basedau!&!Lacher,!2006).!A!focus! on! non_renewable! resources! could! lead! to! less! economic! growth,! stagnation! or! even! a! decrease! of! the! economic! value! of! the! country! (Ross,! 1999).! When! focusing! on! this! non_ renewable! resource! the! development! of! a! country! can! fall! behind.! While! the! country! neglects!its!other!sectors!it!becomes!very!dependent!on!that!specific!non_renewable!good! (Ross,!1999).!! A!resource!curse!is!especially!ironic!when!it!concerns!energy!wealth.!An!energy! wealthy!country!is!a!country!with!an!abundance!in!fossil!fuels.!It!is!ironic!since!these!raw! materials!are!still!highly!demanded!(Holdren,!1991).!As!is!stated!by!Basedau!(2005,!p.!6):!“It! is!very!likely!that!natural!resources!in!Africa!will!gain!even!more!relevance!in!the!near!future.! The!constant!increase!of!the!oil!price!in!2003!and!2004!may!be!subject!to!change!in!the! future;!other!developments!will!not.!(…)!U.S.!government!officials!have!declared!African!oil!
an!issue!of!national!security.!The!hunger!for!oil!is!one!reason!why!China’s!interest!in!the! region!has!been!on!the!rise.”!In!the!same!paper!the!writer!states!that!the!resource!curse! might!endure!or!even!gain!momentum.!Countries!that!are!energy!wealthy!and!do!not! experience!the!desired!economic!growth!could!thus!be!even!worse!off!in!the!future!than! they!are!now.!! However,!not!every!country!abundant!in!fossil!fuels!or!other!non_renewable!natural! resources!experiences!this!curse.!Having!access!to!a!lot!of!non_renewable!natural!resources! could!either!be!a!curse!or!a!blessing.!Norway!and!Botswana!are!examples!of!countries!that! used!their!energy!wealth!in!their!favour.!Both!were!poor!countries!before!the!discovery!of! fossil!fuels!but!experienced!massive!economic!growth!afterwards!(Mehlum!et!al.,!2006).! Venezuela!on!the!other!hand!is!a!country!that!is!very!energy!wealthy!as!well,!but!still!has!not! managed!to!turn!their!abundance!into!better!economic!performance.!Since!fossil!fuels!are! non_renewable!resources!the!energy!wealthy!countries!as!we!know!them!nowadays!will! become!non_existent1.!Oil,!charcoal!and!gas!resources!reproduce!themselves!too!slow!or!will! become!too!expensive!to!harvest!(Holdren,!1991;!Höök!&!Tang,!2013).!One!could!assume! that!the!problem!of!a!resource!curse!because!of!energy!wealth!will!be!solved!when!the!fuels! are!depleted.!However,!as!long!as!there!is!a!possibility!to!turn!the!curse!into!a!blessing! researching!the!reason!behind!the!curse!is!worthwhile.!! In!order!to!discuss!the!impact!fossil!fuels!have!on!economic!performance!one!has!to! understand!why!one!country!experiences!this!abundance!as!a!curse!(i.e.!Venezuela)!while! others!turned!it!into!a!blessing!(i.e.!Norway).!One!difference!between!those!two!countries!is! their!institutional!quality.!Previous!research!already!shows!a!clear!relationship!between!oil! profits!and!corruption!(Arezki!&!Brückner,!2009).!A!country’s!level!of!corruption!is!one!way! to!measure!institutional!quality.!Therefore,!this!thesis!researches!the!impact!of!institutional! quality!in!combination!with!fossil!fuel!abundance!on!a!country’s!economic!performance.! Mehlum!et!al.!(2006)!researched!this!same!relationship!but!for!all!non_renewable!natural! resources.!The!methodology!used!in!this!thesis!is!based!on!their!model.!This!all!leads!to!the! following!research!question:!Is!the!combination!of!being!energy!wealthy!while!having!low! quality!institutions!harmful!for!economic!performance?! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 1!This!research!does!not!address!becoming!energy!wealthy!in!sustainable!or!green!energy.!!!
Three!different!analyses!are!performed.!The!first!includes!all!observations,!the! second!excludes!the!United!States!and!the!third!excludes!all!outliers.!To!test!for!robustness! additional!variables!that!measure!openness!and!institutional!quality!are!included.!The!initial! analysis!shows!that!being!fossil!fuel!abundant!while!having!grabber!friendly!institutions! indeed!harms!economic!performance.!However,!when!performing!robustness!tests!the! hypothesis!is!rejected.! The!structure!of!this!paper!is!as!follows.!Chapter!two!is!a!literature!review.!This! literature!review!includes!relevant!theories!of!existing!literature,!the!limitations!of!existing! literature,!the!key!elements!of!contribution!of!this!thesis!and!the!hypothesis.!Chapter!three! explains!the!model!on!which!the!research!question!and!hypothesis!are!based.!Chapter!four! describes!the!data!and!methodology.!The!results!and!analysis!are!clarified!in!chapter!five.! This!leads!to!a!conclusion!and!discussion!in!chapter!six,!along!with!suggestions!for!further! research.!! ! !
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Literature%Review%
In!this!chapter!the!theory!behind!the!research!question!is!explained.!The!research!in!this! paper!is!related!to!existing!theories,!those!will!be!explained!in!the!first!section!of!this! chapter.!Then!limitations!of!existing!literature!will!be!mentioned,!followed!by!the!key! elements!of!contribution!of!the!research!in!this!thesis.!After!that!the!hypothesis!will! naturally!follow.!! ! Natural!resource!abundance!and!its!effect!on!economic!growth!has!been!broadly!researched! in!the!past!couple!of!decades.!Extensive!research!is!done!by!Knack!and!Keefer!(1995),!Sachs! and!Warner!(1995a,!1997a,!2001)!and!Auty!(2001)!amongst!others.!The!results!of!their! research!state!that!the!economies!in!natural!resource!abundant!countries!tend!to!grow! slower!than!economies!in!countries!that!do!not!have!substantial!natural!resources.!Other! studies!even!state!that!on!average!natural!resource!abundant!countries!are!outperformed! by!countries!with!less!resources!(Gelb,!1988;!Lane!&!Tornell,!1996;!Gylfason,!Herbertsson!&! Zoega,!1999;!Mehlum!et!al.,!2006).!An!example!is!given!by!Mehlum!et!al.!(2006).!They!state! that!‘Asian!tigers’!like!Singapore,!Korea!and!Hong!Kong!do!not!have!an!abundance!in!natural! resources.!Nevertheless,!these!countries!have!experienced!a!steep!increase!in!economic! performance.!On!the!other!hand,!countries!that!do!have!an!abundance!in!resources!like! Venezuela,!Nigeria!and!Angola!do!not!experience!this!economic!growth.!However,!it!is!not! stated!that!the!resource!curse!is!the!only!reason!behind!this!phenomenon!of!lacking! economic!growth.!It!is!important!to!keep!in!mind!that!resource!abundancy!‘on!average’! causes!this!deviation.!There!are!also!examples!of!countries!that!are!abundant!in!natural! resources!and!where!the!economy!does!flourish!like!Botswana,!Canada!and!Norway! (Mehlum!et!al.,!2006).!! ! A!reason!for!the!difference!in!handling!natural!resource!abundance!could!be!due!to! differences!in!institutions!and!the!quality!of!these!institutions.!North!and!Thomas!(1973),! Knack!and!Keefer!(1995),!Engerman!and!Sokoloff!(2000)!and!Acemoglu,!Johnson!and! Robinson!(2001)!find!that!institutions!have!a!decisive!role!regarding!a!country’s!economic! performance.!These!studies!focus!on!institutions!as!being!the!same!‘sort’!of!institution!in! each!country,!only!differentiating!in!quality.!However,!there!are!different!types!of! institutions.!Institutions!can!be!divided!in!institutions!that!prefer!producers!or!institutions!that!prefer!unproductive!grabbers.!The!reason!that!Mehlum!et!al.!(2006)!divide!institutions! in!grabber!and!producer!friendly!institutions!is!because!of!their!characteristics.! Characteristics!of!grabber!friendly!institutions!are!that!there!is!more!violence,!warlord! competition!and!rebelling!in!those!countries.!Mehlum!et!al.!(2006,!p.!3)!even!cite!a!paper2! on!civil!wars!that!found!that!“the!extent!of!primary!commodity!exports!is!the!largest!single! influence!on!the!risk!of!conflict.”!Overall!institutions!that!are!grabber!friendly!are!low!quality! institutions.!They!have!a!weak!rule!of!law!and!high!levels!of!corruption.!Institutions!that!are! producer!friendly!have!the!characteristics!of!high!quality!institutions!(Mehlum!et!al.,!2006).! Therefore,!the!idea!behind!this!thesis!is!that!bad!institutions!in!combination!with!fossil!fuel! abundance!leads!to!a!worsening!of!a!country’s!economic!performance.!Hence!this!will!be!the! case!in!countries!with!grabber!friendly!institutions.!Countries!with!producer!friendly! institutions!should!enough!have!enough!institutional!quality!to!overcome!or!eliminate!a! resource!curse.!! ! The!differentiation!between!producer!friendly!and!grabber!friendly!institutions! focusses!on!how!a!country!distributes!resource!rents!and!how!their!activities!are!divided.! Sachs!and!Warner!address!the!distribution!of!resource!rents!in!their!1995a!paper.!Resource! rents!are!the!profits!that!are!made!from!natural!resources!after!their!extraction!and! production!costs!are!deducted!from!the!selling!price.!Specifically,!“the!surplus!over!and! above!all!the!costs!of!operation!is!the!‘rent.’!The!costs!of!operation!in!this!context!include!all! normal!cash!expenditure!plus!depreciation,!the!opportunity!cost!of!labour!and!capital!(that! is,!the!potential!returns!from!the!next!most!profitable!returns!from!the!next!most!profitable! use!of!those!inputs),!a!margin!for!the!risk!being!faced!and!a!return!on!any!investment!in! exploring!and!developing!the!resource”!(Campbell!&!Haynes,!1990,!p.!2).!The!resource!rents! are!what!makes!natural!resources!profitable.!One!of!Sachs!and!Warner’s!(1995a)!hypotheses! is!that!high!natural!abundance!leads!to!rent_seeking.!!An!idea!mentioned!in!their!paper!is! that!rent_seeking!could!distract!the!government!from!investing!in!growth!supporting!public! goods!like!infrastructure.!However,!they!dismiss!this!notion.!In!general,!their!research!states! that!resource!abundance!would!lead!to!a!weakening!of!institutional!quality!resulting!in! lower!economic!growth.!In!other!words,!their!conclusion!is!that!a!deterioration!of! institutional!quality!is!the!result!caused!by!natural!resource!abundance.!As!stated!by! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 2!Skaperdas!(2002).!Warlord!Competition.!Journal'of'Peace'Research,!39:!435_446.!
Mehlum!et!al.!(2006,!p.!2)!regarding!the!research!by!Sachs!and!Warner!(1995a)!“The!lack!of! evidence!for!the!proposition!that!resource!abundance!causes!institutional!decay,!is!not! sufficient!to!dismiss!the!rent!extraction!story!altogether!as!Sachs!and!Warner!seem!to!do.”! Mehlum!et!al.!(2006)!explain!that!natural!resources!might!not!cause!institutional!decay!but! can!put!institutional!arrangements!to!a!test.!In!other!words,!the!combination!of!resource! abundance!and!a!country’s!institutional!quality!can!be!assumed!to!affect!a!country’s! economic!performance.!Arezki!and!Brückner!(2009)!have!done!a!similar!research!as!Sachs! and!Warner!(1995a)!and!as!this!thesis.!However,!they!focus!on!the!specific!relationship! between!oil!rents!and!institutional!quality.!One!reason!for!the!worsening!of!institutional! quality!according!to!them!could!be!that!state!ownership!of!natural!resources!leads!to!an! abuse!of!power!and!thus!corruption!(Ross,!1999;!Arezki!&!Büchner,!2009).!Karl!(2004)!even! states!that!there!is!more!civil!conflict!and!inter_state!war!in!countries!that!are!dependent!on! oil.!Therefore,!it!is!not!unreasonable!to!assume!that!corruption!and!institutional!instability! are!associated!with!fossil!fuel!abundance!and!their!rents.!! Frankel!(2010)!addresses!Isham,!Woolcock,!Pritchett!and!Busby!(2005)!about!the! damaging!impact!of!several!natural!resources.!Some!natural!resources!are!ought!to!be! damaging!for!institutional!development.!When!institutional!development!is!hampered! institutional!quality!will!suffer.!The!authors!state!that!oil!is!one!of!the!natural!resources!with! the!most!damaging!effect.!Sala_I_Martin!and!Subramanian!(2008)!also!state!that!an! abundance!of!several!natural!resources!and!especially!oil!is!damaging!to!institutional!quality.! They!also!find!that!being!abundant!in!oil!negatively!affects!economic!growth.!Another! negative!effect!of!the!extraction!of!oil!and!its!oil!rents!is!the!worsening!of!corruption,!as! indicated!by!Arezki!and!Brückner!(2009).!! ! One!way!to!address!a!country’s!institutional!quality!is!to!look!at!their!score!on!the! corruption!index.!Table!1!in!the!appendix!shows!the!corruption!index!by!Transparency! International!(n.d.).!Their!corruption!index!is!one!of!the!variables!used!in!this!thesis!to!assess! a!country’s!institutional!quality!as!robustness!test.!The!higher!a!country!scores!on!this!index! the!lower!the!level!of!corruption!is!and!thus!the!higher!its!institutional!quality!is.!Mehlum!et! al.!(2006)!state!that!Botswana!is!a!country!that!used!their!energy!wealth!in!their!favour.!As! can!be!seen!in!table!1!Botswana!is!the!highest!scoring!African!country!on!the!corruption! index!by!Transparency!International!(and!thus!has!a!low!level!of!corruption).!It!has!the!
fourth!highest!economic!growth!level!of!all!182!countries!included!in!this!thesis3.!This!shows! that!there!are!countries!with!high!levels!of!fossil!fuel!abundance!that!do!show!better! economic!performance!than!countries!that!are!resource!poor.!Thus!Botswana!does!not! experience!their!fossil!fuel!abundance!as!a!curse,!but!it!also!has!high!institutional!quality!as! indicated!by!the!low!level!of!corruption.!Another!country!that!ranks!amongst!the!highest! scoring!countries!on!the!corruption!index!is!Norway.!As!stated!by!Mehlum!et!al.!(2006)! Norway!was!one!of!the!poorest!countries!in!the!1900’s!but!after!exporting!their!natural! resources!(primarily!oil)!in!combination!with!having!high!quality!institutions!it!now!is!one!of! the!wealthiest!countries.!On!the!other!hand!there!are!countries!that!are!energy!wealthy!and! experience!negative!economic!growth4.!These!countries!have!relatively!low!institutional! quality5.!! One!can!assume!that!the!discovery!or!presence!of!fossil!fuels!is!exogenous.!Fossil! fuels!simply!are!in!the!ground!or!they!are!not.!Its!existence!is!not!affected!by!any!other! variables.!Institutional!quality!however!can!be!seen!as!endogenous;!this!is!dependent!on! different!legal,!political!and!economic!factors.!However,!assuming!that!fossil!fuel!discoveries! are!exogenous!can!be!discussed!as!well,!as!is!done!by!Norman!(2009).!Norman!(2009)!states! that!the!discovery!of!fossil!fuels!is!dependent!on!the!efficiency!of!a!country.!One!can!argue! that!the!resources!to!search!for!fossil!fuels!indeed!have!to!be!present.!Some!of!these! resources!are!the!need!for!investment!and!technology.!However,!the!technology!already! exists!in!the!wealthier!countries!so!it!should!not!be!unavailable!to!countries!with!less! economic!resources!(they!can!copy!it).!Arezki!and!van!der!Ploeg!(2007,!2011)!use! instrumental!variables!to!control!their!endogenous!explanatory!variables!and!they!find!that! the!adverse!effect!of!natural!resources!on!economic!performance!is!associated!with!poor! institutions.!However,!a!study!by!Alexeev!and!Conrad!(2009)!does!not!find!evidence!of!a! positive!relationship!between!natural!resources!and!institutional!quality.!A!good!argument! on!institutional!quality!is!given!by!other!papers!(Mehlum!et!al.,!2006;!Robinson,!Torvik!&! Verdier,!2006;!McSherry,!2006;!Smith,!2006;!Collier!&!Goderis,!2007)!and!mentioned!in! Frankel’s!(2010)!paper.!These!papers!state!that!an!important!factor!of!the!effect!of!natural! resources!on!economic!performance!is!what!the!quality!of!the!institutions!is!or!was!at!the! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 3!Extensive!data!can!be!found!in!the!appendix.! 4!United!Arab!Emirates,!Niger,!Kuwait,!Ukraine,!Brunei,!Qatar!and!Serbia,!see!appendix.!! 5!See!appendix.!!
time!of!the!discovery!of!the!fossil!fuels.!This!is!not!something!that!can!easily!be!included!in!a! research!with!another!focus,!like!this!thesis,!but!is!an!interesting!research!on!its!own.!When! having!high!quality!institutions!from!the!start!it!is!more!likely!that!national!welfare!will!profit! from!the!natural!resources!than!only!the!elite!(Frankel,!2010).!! Frankel!(2010)!displays!the!relationship!between!the!average!growth!rate!and!natural! resource!abundance!in!a!graph.!In!figure!1!one!sees!a!negative!relationship!between!those! variables.!In!figure!1!only!two!countries!experience!negative!economic!growth.!The!dataset! used!in!this!thesis!finds!more!countries!that!experience!negative!economic!growth6.! However,!figure!1!does!show!that!there!are!a!lot!of!countries!that!experience!slower! economic!growth!than!average.!A!resource!curse!does!not!necessarily!lead!to!negative! economic!growth!but!less!economic!performance!overall.!Venezuela!for!example!has!a!lot!of! natural!resources,!a!lot!of!fossil!fuels!as!well,!and!they!score!very!low!on!GDP!growth!as!can! be!seen!in!figure!1.!When!looking!at!the!corruption!index!in!table!1!in!the!appendix!they!are! the!fourth!lowest!scoring!country!(indicating!low!institutional!quality).!Therefore,!one!could! assume!that!their!resource!abundance!in!combination!with!their!low!institutional!quality!is! the!reason!for!its!low!average!growth!rate.!Saudi!Arabia!is!another!country!that!exports!a!lot! of!natural!resources,!including!fossil!fuels.!Saudi!Arabia!displays!a!higher!average!growth! rate!than!Venezuela!in!figure!1!but!then!scores!amongst!the!higher!African!countries!on!the! same!corruption!index.!China!can!be!considered!an!outlier!in!this!graph!since!they!do! produce!a!lot!of!fossil!fuels!(however,!figure!1!does!not!show!that).!! ! Figure'1.'Statistical'relationship'between'mineral'exports'and'growth.'Reprinted'from'“The' natural'resource'curse:'a'survey,”'by'Frankel'(2010).'National'Bureau'of'Economic'Research.' No.'w15836.' !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 6!Six!of!these!countries!are!abundant!in!fossil!fuels:!Brunei,!Kuwait,!Niger,!Qatar,!Ukraine!and! the!United!Arab!Emirates!
' ! One!limitation!of!existing!literature!is!that!it!is!not!clear!what!is!the!cause!and!what!is! the!effect!when!researching!institutional!quality!and!resource!abundance.!Mehlum!et!al.! (2006)!mention!earlier!research!that!focusses!on!the!resource!curse!(i.e.!van!Wijnbergen,! 1984;!Krugman,!1987;!Sachs!and!Warner,!1995a;!Lane!&!Tornell,!1996;!Tornell!&!Lane,!1999;! Torvik,!2002)!that!does!not!explain!what!variable!affects!what.!So!it!is!not!clear!whether! resource!abundance!is!the!cause!and!bad!institutional!quality!the!effect!or!the!other!way! around.!As!defined!by!Mehlum!et!al.!(2006,!p.!3)!“These!models![the!models!used!in! previous!literature]!explain!important!aspects!of!the!resource!curse,!but!they!do!not!explain! why!resource!abundance!retards!growth!in!some!countries!but!not!in!others.”!This!thesis! does!not!assume!a!specific!cause!and!a!specific!effect!but!focusses!on!the!relationship! between!the!abundance!and!institutional!quality.!! ! This!thesis!contributes!to!existing!literature!in!different!ways.!First,!the!focus!on!the! relationship!between!fossil!fuel!abundance!and!institutional!quality!is!one!of!the!key! elements!of!contribution!to!existing!literature.!An!interaction!term!“captures!the!essence!of! the!(…)!prediction!that!resource!abundance!is!harmful!to!growth!only!when!the!institutions! are!grabber!friendly![have!high!quality!institutions]”!(Mehlum!et!al.,!2006,!p.!16).!Second,! another!key!element!of!contribution!is!filling!the!gap!between!the!focus!on!either!all!natural!
resources!or!just!on!oil.!There!is!no!existing!literature!that!focuses!specifically!on!fossil!fuels.! Besides!that,!no!relationship!between!energy!wealth!on!economic!growth!is!explicitly! examined.!The!focus!either!lays!on!natural!resources!(or!oil)!on!one!side!and!corruption,!civil! conflict!or!democracy!on!the!other!(Skaperdas,!2002;!Karl,!2004).!Third,!no!other!paper! emphases!on!fossil!fuels!and!the!blessing!it!could!be!for!a!country’s!economic!performance.! Even!though!there!only!are!so!many!years!to!turn!the!curse!(if!experiencing!one)!into!a! blessing!and!profit!from!it!since!fossil!fuels!will!be!depleted.!Therefore,!in!order!to!turn!this! curse!into!a!blessing!one!has!to!know!what!the!reason!is!behind!this!difference!in! experience.!This!thesis!aims!to!do!that.! There!is!a!difference!between!researching!all!natural!resources!and!specifically!fossil! fuels.!As!is!mentioned!in!Arezki!and!Brückner!(2009,!p.!3)!“a!recent!literature!has!shown!the! importance!of!not!pooling!commodities!when!analysing!the!effects!of!resource!rents!on! governance!and!growth.”!Therefore,!this!thesis!can!ensure!homogeneity!in!the!effects!as! well!as!Arezki!and!Brückner’s!2009!paper!does,!since!the!focus!of!this!thesis!is!just!fossil!fuels! and!not!all!natural!resources.!Studying!the!relationship!between!fossil!fuels!and!institutional! quality!helps!understanding!a!country’s!economic!performance!(Arezki!&!Brückner,!2009).!! Another!difference!with!existing!literature!is!the!use!of!a!dataset!provided!by!one!of! the!largest!oil!and!gas!multinationals.!British!Petroleum!(BP)!publishes!a!yearly!report.!This! report!includes!a!dataset!with!information!about!the!worldwide!fossil!fuel!production.!! There!is!a!general!dataset!available!in!the!World!Bank!that!gives!fossil!fuel!exports!as! percentage!of!merchandise!exports.!However,!this!is!not!as!thorough.!By!using!BP’s!dataset! data!for!69!countries!can!be!included,!whereas!other!papers!(i.e.!Arezki!&!Brückner,!2009)! were!only!able!to!include!observations!of!30!countries!over!13!years.!As!measure!for! institutional!quality!three!different!variables!that!are!based!on!different!indexes!are!used,! two!of!those!to!test!robustness.!This!thesis!also!includes!various!(six)!control!variables!that! could!influence!economic!performance,!to!create!the!most!reliable!analysis.!! Taking!all!this!into!the!account!the!research!question!of!this!paper!naturally!follows:! Is!the!combination!of!being!energy!wealthy!while!having!low!quality!institutions!harmful!for! economic!performance?!Whether!or!not!a!country!experiences!a!resource!curse!is!measured! by!a!country’s!economic!performance.!As!measurement!for!economic!performance!a! country’s!gross!domestic!product!per!capita!growth!is!used,!as!is!in!existing!literature!(Knack! &!Keefer,!1995;!Sachs!and!Warner,!1995a,!1997a,!1997b,!2001;!Mehlum!et!al.,!2006).!To!
measure!energy!wealth!fossil!fuel!production!as!provided!by!BP!is!used!as!fossil!fuel! abundance!measurement.!This!all!leads!to!the!following!hypothesis:!
Hypothesis!1:!If!a!country!has!grabber!friendly!institutions![low!institutional!quality],! then!being!energy!wealthy!will!negatively!influence!a!country’s!economic!performance.!
Model%
! The!model!that!is!the!foundation!for!this!paper’s!hypothesis!shows!the!relationship! between!differences!in!institutional!quality!(producer!friendly!and!grabber!friendly)!and! economic!growth.!The!model!in!this!research!is!based!on!previous!literature!by!Mehlum!et! al.!(2006)7.!As!stated!by!Mehlum!et!al.!(2006)!models!in!other!papers!do!illustrate!the! existence!of!a!resource!curse,!but!not!why!it!exists!in!one!country!and!not!another.!The! effect!of!being!energy!wealthy!in!combination!with!(low)!institutional!quality!is!the!main! focus!of!this!research.!The!model!shows!that!the!reason!behind!a!resource!curse!is!based! on!the!quality!of!institutions!in!a!country.!The!model!divides!this!quality!in!high!quality! producer!friendly!institutions!and!low!quality!grabber!friendly!institutions.!! The!model!by!Sachs!and!Warner!(1997a)!shows!that!growth!is!negatively!affected!by! natural!resource!abundance.!The!modified!model!by!Mehlum!et!al.!(2006)!includes!the! dependence!on!quality!of!institutions.!The!model!in!this!thesis!adapts!Mehlum!et!al.’s! (2006)!model,!but!focusses!on!fossil!fuels!instead!of!all!natural!resources.!! ! The!main!goal!of!Mehlum!et!al.’s!(2006)!model!is!the!allocation!of!entrepreneurs! between!grabber!friendly!and!production!friendly.!This!thesis!does!not!focus!on!the! amount!of!entrepreneurs!between!grabber!friendly!and!production!friendly!institutions.! However,!understanding!their!model!helps!clarify!the!hypothesis.!Entrepreneurs!are!an! important!factor!for!a!country’s!economic!performance.!Institutions!in!some!countries!will! favour!the!producers,!while!institutions!in!other!countries!favour!the!grabbers.!As! described!by!Mehlum!et!al.!(2006)!in!countries!with!producer!friendly!institutions!rent_ seeking!and!production!are!complimentary!activities.!In!countries!with!grabber!friendly! institutions!rent_seeking!and!production!are!competing!activities.!“With!grabber!friendly! institutions!there!are!gains!from!specialization!in!various!sorts!of!unproductive!influence! activities,!while!there!are!extra!costs!of!production!activities!due!to!discretionary!power! and!favouritism.!Typical!features!of!grabber!friendly!institutions!are!a!weak!rule!of!law!and! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 7!Their!model!is!based!on!earlier!models!used!to!research!the!resource!curse!(Krugman,! 1987;!Sachs!and!Warner,!1995a;!Lane!and!Tornell,!1996;!Tornell!and!Lane,!1999;!Torvik,! 2002;!Wijnbergen,!1984).!a!high!risk!of!expropriation,!malfunctioning!bureaucracy!and!corruption!in!the!government”! (Mehlum!et!al.,!2006,!p.!2).!A!weak!rule!of!law!and!a!high!risk!of!expropriation!are! characteristics!of!low!institutional!quality!(Knack!and!Keefer,!1995;!Mehlum!et!al.,!2006).!In! related!literature!by!Sachs!and!Warner!(1995a)!a!model!states!that!abundance!in!natural! resources!causes!institutional!quality!to!be!low,!and!therefore!economic!growth!would!be! low.!The!research!in!this!thesis!does!assume!that!a!country’s!institutional!quality!can!be! affected!by!being!resource!rich,!but!it!does!not!claim!that!being!resource!rich!is!the!main! reason!for!low!institutional!quality.!The!model!in!this!thesis!combines!institutional!quality! and!resource!abundance.!To!specify!this!relationship!an!interaction!term!is!included!in!the! regressions.!The!explanation!behind!this!relationship!is!that!in!countries!with!producer! friendly!institutions!the!natural!resources!attract!entrepreneurs!and!therefore!there!will!be! more!economic!growth.!Whereas!in!the!countries!with!grabber!friendly!institutions!the! entrepreneurs!will!work!in!unproductive!industries!and!thus!will!not!contribute!to!the! economic!growth!rate.!! ! Figure'2.'Reprinted'from'“Institutions'and'the'resource'curse,”'by'Mehlum,'H.,'Moene,'K.,'&' Torvik,'R.'(2006).'The'economic'journal,'116(508),'p.'12.' !
! The!exact!mathematical!model!with!the!allocation!of!entrepreneurs!between! production!and!grabbing!can!be!found!in!Mehlum!et!al.’s!(2006)!paper.!Figure!2!illustrates! the!conclusion!of!their!model.!On!the!horizontal!axis!!"!is!the!number!of!productive! entrepreneurs.!On!the!vertical!axis!#!is!the!value!of!resources.!The!downward!sloping!bold! line!indicates!the!long!run!equilibrium!number!of!producers.!The!line!is!downward!sloping! because!the!more!natural!resources!a!country!has,!the!less!producers!there!are!in!a! grabber!equilibrium.!The!iso_curves!represent!income.!To!keep!total!income!constant!while! the!number!of!producers!declines!more!natural!resources!are!needed,!thus!the!iso_curves! are!downward!sloping!as!well.!Let!us!imagine!two!countries,!country!A!and!country!B.! Country!A!is!a!resource!poor!country;!it!has!few!resources!with!a!lot!of!producers.!Country! B!is!a!resource!rich!country;!it!has!a!lot!of!resources!but!only!a!few!producers.!Both! countries!have!the!same!initial!income!level!and!the!same!quality!of!institutions.!Initially! country!A!starts!in!point!$!and!moves!to!point!$′.!Country!B!starts!in!point!&!and!moves!to! point!&′.!Since!country!A!is!resource!poor!it!will!move!to!a!production!equilibrium.!Because! country!B!is!resource!rich!it!will!end!up!in!a!grabber!equilibrium!which!means!that!there!is!! low!quality!of!institutions.!This!means!that!the!resource!rich!country!moves!to!a!lower! income!level!than!the!resource!poor!country.!Thus!the!growth!in!the!resource!rich!country! is!lower,!whereas!it!would!be!higher!when!there!were!fewer!resources.!There!would!be! another!outcome!if!the!distribution!of!institutions!was!different.!If!country!B!had!more! producer!friendly!institutions!and!thus!had!higher!quality!institutions,!it!would!be!more! immune!to!grabbing.!If!a!country!is!(more)!immune!to!grabbing!it!can!still!move!to!a! production!equilibrium.!This!would!move!country!B’s!long!run!equilibrium!curve!to!the! dotted!line.!Since!there!are!more!producer!friendly!institutions!it!would!end!up!in!point!&"! and!thus!a!higher!income!level.!However,!this!is!only!possible!when!there!are!producer! friendly!institutions.!Therefore,!a!country!with!producer!friendly!institutions!can!overcome! or!eliminate!a!resource!curse.!Thus!according!to!this!model,!when!there!are!more!producer! friendly!institutions!the!resource!rich!country!outperforms!the!resource!poor!country,! which!contradicts!the!resource!curse!paradox.!This!is!visible!when!focussing!on!low!quality! institutions!as!grabber!friendly!and!high!quality!institutions!as!producer!friendly! institutions.!
Data%and%Methodology%
This!chapter!describes!the!data!and!methodology!used!in!this!thesis!to!answer!the!extent!to! which!institutions!deter!economic!growth!when!a!country!is!energy!wealthy.!This!thesis! particularly!focusses!on!fossil!fuels!because!of!the!different!effect!being!energy!wealthy!has! on!different!countries.!One!country!experiences!fossil!fuel!abundance!as!a!curse!(i.e.! Venezuela)!while!other!countries!turned!it!into!a!blessing!(i.e.!Norway).!This!thesis!tests!the! relationship!between!the!dependent!variable!GDP!growth!per!capita,!independent!variables! fossil!fuel!abundance!and!institutional!quality!and!several!control!variables.!Regressions!will! be!done!using!ordinary!least!squares.!!! !Key%Variables
%
Besides!the!dependent!variable!GDP!per!capita!growth!(also!mentioned!as!GDP!growth! throughout!this!thesis)!and!the!two!independent!variables!fossil!fuel!abundance!and! institutional!quality,!six!control!variables!are!included.!These!control!variables!control!for! economic!performance.!The!dataset!is!limited!by!availability.!The!averages!of!data!for!182! countries!over!a!period!from!1970!to!2014!is!used.!1970!is!chosen!as!start!and!base!year! since!the!data!for!most!countries!is!available!since!then.!69!countries!are!fossil!fuel! producing!countries.!To!test!for!robustness!an!extra!openness!variable!and!two!extra! institutional!quality!variables!are!included.!The!Centre!for!International!Development! provides!the!data!for!the!original!institutional!quality!variable.!Data!for!the!other!variables!is! obtained!via!The!World!Bank,!Penn!World!Tables!and!BP.!A!legend!and!all!data!can!be!found! in!the!appendix.! !Dependent%Variables%
GDP%per%capita%growth% Gross!domestic!product!per!capita!growth!(annual!%)!is!the!dependent!variable.!This!is!the! dependent!variable!since!this!paper!wants!to!measure!a!country’s!economic!performance.! GDP!per!capita!will!be!the!measure!for!economic!growth,!as!it!shows!the!average!annual!change!of!a!country’s!GDP!per!citizen.!As!stated!by!the!OECD!(n.d.)!“Gross!domestic!product! (GDP)!per!capita!is!a!measure!of!economic!activity!and!one!of!the!core!indicators!of! economic!performance.”!This!is!roughly!the!same!variable!as!is!used!in!Mehlum!et!al,!(2006)! and!Sachs!and!Warner!(1995a,!1997a)!but!in!this!thesis!more!recent!data!is!used.!The!exact! variable!as!used!in!their!research!is!not!available!anymore!in!any!recent!Penn!World!Tables.! GDP!in!the!Penn!World!Tables!nowadays!is!divided!into!three!categories:!real!GDP!on!the! expenditure!side,!real!GDP!on!the!output!side!and!real!GDP!from!national!accounts.!Real! GDP!on!the!expenditure!side!measures!the!standards!of!living!across!countries.!Real!GDP!on! the!output!side!measures!the!productive!capacity!of!an!economy.!According!to!Feenstra,! Inklaar!and!Timmer!(2015)!real!GDP!on!from!national!accounts!is!the!best!variable!to!use! when!answering!questions!that!need!the!growth!rate!of!real!GDP.!This!thesis!is!interested!in! a!country’s!economic!growth,!therefore!real!GDP!from!national!accounts!is!used.!It!is!called! real!GDP!since!“Real!GDP!means!GDP!that!is!evaluated!at!constant!prices!across!countries.!It! is!not!enough!to!hold!just!one!price!constant!across!counties!(i.e.!to!have!a!numeraire!such! as!a!traded!good),!but!it!is!essential!to!hold!all!prices!for!goods!and!services!constant!across! countries!when!evaluating!real!GDP”!(Feenstra,!Inklaar!&!Timmer,!2015,!p.!3152).!! ! To!get!from!real!GDP!from!national!accounts!to!real!GDP!per!capita!growth!the! variable!is!divided!by!the!population!per!year!(also!provided!by!the!Penn!World!Tables)!and! then!growth!per!year!is!calculated!((year-− year/)/year/).!Data!for!RGDPPCG!(real!GDP!
per!capita!growth)!can!be!found!in!the!appendix.!! !
Independent%Variables%
Fossil%fuel%abundance! The!resource!curse!where!this!thesis!on!focusses!is!a!resource!curse!based!on!fossil!fuel! abundance.!Fossil!fuel!abundance!is!the!variable!that!measures!a!country’s!energy!wealth.! With!institutional!quality!these!variables!are!the!independent!variables!needed!to!answer! the!research!question.!Fossil!fuel!abundance!is!measured!by!fossil!fuel!production.!The!fossil! fuels!included!in!this!dataset!are!coal,!oil!and!natural!gas!products.!These!are!different! products!with!different!states!of!matter.!Coal!is!solid,!oil!is!liquid!and!natural!gas!is!a!gas.! Therefore,!it!is!not!possible!to!simply!combine!all!produced!amounts.!There!is!no!obvious! way!to!measure!a!country’s!total!fossil!fuel!extraction.!Since!this!research!focusses!on!more!than!one!source!of!fossil!fuels!another!way!had!to!be!found!in!order!to!add!them!together.! Oil!is!measured!in!barrels!and!tonnes.!Gas!in!billion!cubic!meters,!billion!cubic!feet!per!day! and!million!tonnes!of!oil!equivalent.!Coal!is!measured!in!tonnes!and!million!tonnes!of!oil! equivalent.!When!using!the!million!tonnes!of!oil!equivalent!both!gas!and!coal!can!be! measured!as!the!same!amount!of!energy!oil!releases!per!tonne!(which!is!42!gigajoules! according!to!Hall,!1991).!Using!this!measurement!does!not!take!the!economic!value!of!the! different!fossil!fuels!into!account.!Of!course!they!are!not!substitutes,!as!you!do!not!fill!an! aeroplane!with!gas!or!coal!(Wilson,!2014).!However,!the!economic!value!of!fossil!fuels!does! not!concern!the!research!question.!! The!fact!that!fossil!fuels!will!be!depleted!is!one!of!the!reasons!for!the!societal! relevance!of!this!research.!The!energy!wealthy!countries!might!still!be!able!to!profit!from! their!resources,!whereas!they!will!not!as!soon!as!the!resources!are!exhausted,!become!too! expensive!or!when!the!world!shifts!to!the!use!of!sustainable!energy!(Chu!&!Majumdar,! 2012).!One!could!assume!that!it!is!a!good!thing!that!fossil!fuels!will!be!depleted.!That!way! fossil!fuels!could!not!lead!to!a!resource!curse!anymore.!However,!there!are!countries!that! have!turned!their!fossil!fuel!abundance!into!a!blessing.!This!thesis!finds!turning!being!fossil! fuel!abundant!into!a!blessing!more!important!than!the!ending!the!curse.!! Data!on!oil!production!in!million!tonnes,!gas!production!in!million!tonnes!of!oil! equivalent!and!coal!production!in!million!tonnes!of!oil!equivalent!is!presented!in!the!BP! Statistical!Review!of!World!Energy!June!2016.!These!datasets!and!their!added!value!as!total! fossil!fuel!production!(tonnes!of!oil!equivalent)!are!presented!in!the!appendix!as!OILMT!(oil! production!in!million!tonnes),!GASTOE!(gas!production!in!million!tonnes!of!oil!equivalent),! COALTOE!(coal!production!in!million!tonnes!of!oil!equivalent)!and!FFTOE!(fossil!fuel! production!in!million!tonnes!of!oil!equivalent).!! ! Institutional%quality%% The!combination!of!fossil!fuel!abundance!and!institutional!quality!is!assumed!to!affect!a! country’s!economic!performance.!Hence,!institutional!quality!is!the!second!independent! variable.!Institutional!quality!in!this!thesis!is!composed!of!five!indexes!created!by!the!Center! for!Institutional!Reform!and!the!Informal!Sector.!The!data!is!stored!in!the!International! Country!Risk!Guide,!by!Political!Risk!Services.!The!five!indexes!are!a!rule!of!law!index,!a!
bureaucratic!quality!index,!a!corruption!in!government!index,!a!risk!of!expropriation!index,! and!a!government!repudiation!of!contracts!index.!! The!rule!of!law!index!measures!the!degree!to!which!the!public!accepts!a!country’s! institutions,!their!implemented!laws!and!their!efficiency!(Sachs!&!Warner,!1995a).!A!high! rule!of!law!means!that!“there!are!sound!political!institutions,!a!strong!court!system,!and! provisions!for!an!orderly!succession!of!power”!(Herzfeld!&!Weiss,!2003,!p.!631).!A!low!rule!of! law!index!means!that!“there!is!a!tradition!of!depending!on!physical!force!or!illegal!means!to! settle!claims”!(Herzfeld!&!Weiss,!2003,!p.!631).!The!rule!of!law!index!is!measured!from!0!to! 6.!! The!bureaucratic!quality!index!measures!“the!autonomy!from!political!pressure!and! the!strength!and!expertise!to!govern!without!drastic!changes!in!policy!or!interruptions!in! government!services”!(Sachs!&!Warner,!1997a,!p.!33).!Low!bureaucratic!quality!means!that! institutions!lack!procedural!clarity!and!technical!competence,!which!makes!them!less! efficient!(Knack!&!Keefer,!1995).!Contracts,!trade!licences,!police!protection!etcetera!are! awarded!based!on!other!than!technical!efficient!criteria!(Knack!&!Keefer,!1995).!The!higher! the!index!the!more!bureaucratic!a!country!is.!The!rule!of!law!index!and!the!bureaucratic! quality!index!correlate!strongly!(0.98)!(Sachs!and!Warner,!1995a).!The!bureaucratic!quality! index!is!scored!from!0!to!6.!!! The!corruption!in!government!index!is!another!measure!for!the!efficiency!of! government!services.!It!specifically!measures!“whether!illegal!payments!are!generally! expected!throughout!lower!levels!of!government,!especially!those!bribes!connected!with! import!and!export!licenses,!exchange!controls,!ta!assessment,!police!protection,!or!loans”! (Pivovarsky!Clements,!Gupta!&!Tiongson,!2003,!p.!9).!It!reflects!the!assessment!of!foreign! investors.!The!investors!are!asked!whether!special!payments!asked!by!government!officials! can!be!expected!(Jain,!2002).!Corruption!does!not!necessarily!mean!less!efficiency,!but!there! is!a!lack!of!certainty!for!the!entrepreneurs!about!the!government’s!commitment!towards! them.!“This!discourages!investment!and!encourages!forms!of!economic!activity!that!are!less! vulnerable!to!expropriation!(Knack!&!Keefer,!1995,!p.!7).!These!entrepreneurs!are!important! for!a!country’s!economic!performance.!The!corruption!in!government!index!is!scored!0!to!6.! The!risk!of!expropriation!measures!the!risk!of!“outright!confiscation!or!forced! nationalization”!(Sachs!&!Warner,!1997a,!p.!33).!It!can!be!interpreted!as!a!proxy!for!the! security!of!property!and!contract!rights.!In!order!to!reduce!the!threat!of!expropriation!
entrepreneurs!are!likely!to!move!their!business!to!other!activities!although!they!might!be! less!profitable!(Knack!&!Keefer,!1995).!This!shows!similarities!to!a!resource!curse.!There! entrepreneurs!do!not!profit!from!the!most!lucrative!businesses.!This!will!negatively!affect! economic!performance.!The!risk!of!expropriation!is!scored!from!0!to!10.!! The!government!repudiation!of!contracts!index!is!another!indicator!of!contract! enforcement!and!government!credibility.!It!measures!“the!risk!of!a!modification!in!a! contract!taking!the!form!of!a!repudiation,!postponement!or!scaling!down”!(Sachs!&!Warner,! 1997a,!p.!33).!When!the!contracts!between!the!entrepreneurs!and!the!government!are!not! respected!by!the!government!the!entrepreneurs!cannot!count!on!any!enforcement!of!other! (private!party)!contracts!as!well.!This!will!lead!to!‘self_enforcing’!which!can!lead!to!cheating! or!reneging.!When!this!happens!it!will!negatively!affect!any!Pareto_improving!exchanges.! The!lack!of!credibility!will!make!entrepreneurs!suspicious!about!their!institutions.!(Knack!&! Keefer,!1995).!The!government!repudiation!of!contracts!index!is!scored!0!to!10.! Knack!and!Keefer!(1995)!are!the!first!to!incorporate!these!five!indexes!into!one! overall!institutional!quality!index.!The!five!indexes!deal!with!law!enforcement!on!one!side!to! the!government’s!stance!toward!business!in!general.!Existing!literature!already!shows!that! these!indexes!affect!a!country’s!economic!growth!(Porta,!Lopez_de_Silane,!Shleifer!&!Vishny,! 1996).!Because!of!low!institutional!quality!there!will!be!inefficiency.!This!inefficiency!harms! investment!and!trade,!which!has!a!negative!effect!on!the!introduction!of!foreign!technology! in!the!country!(Knack!&!Keefer,!1995).!A!low!score!on!the!institutional!quality!index!is! favourable!for!the!grabber!friendly!institutions,!since!“there!is!a!weak!rule!of!law!and!a!high! risk!of!expropriation,!malfunctioning!bureaucracy!and!corruption!in!the!government”! (Mehlum!et!al.,!2006,!p.!15).!A!high!score!is!advantageous!for!producer!friendly!institutions.! Since!the!values!of!the!five!indexes!use!different!ranges!they!are!all!scaled!and!weighted.! Adding!them!up!the!score!ranges!between!0!(low!quality/grabber!friendly)!to!1!(high! quality/producer!friendly).!! Two!additional!variables!to!measure!institutional!quality!are!included!because!of!a! large!amount!of!missing!values!in!the!original!variable!and!to!test!for!robustness.!Those! variables!are!retrieved!from!a!study!by!Aljaz!Kuncic8!and!a!study!by!Transparency! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 8!Measuring!legal,!political!and!economic!institutions.!
International9.!The!study!by!Kuncic!uses!“more!than!thirty!established!institutional!indicators! (…)!which!capture!to!a!large!extent!the!complete!formal!institutional!environment!of!a! country”!(Kuncic,!2013).!Transparency!International!provides!a!corruption!index!based!on! the!perceived!level!of!public!sector!corruption.!! The!original!institutional!quality!variable!can!be!found!as!IQUALITY!in!the!appendix.! The!additional!variables!are!named!IQUALITYK!and!CORRUPTION!respectively.!! ! Interaction%term%[345567839:78;<9=>;=?:]8∗8[6=5B6B9B64=;78C9;76BD]%% This!thesis!focusses!on!the!relationship!between!fossil!fuel!abundance!and!institutional! quality!and!its!impact!on!economic!performance.!Both!variables!are!independent!variables.! An!interaction!term!helps!to!understand!a!relationship!between!variables.!When!including! an!interaction!term,!where!two!variables!are!multiplied,!their!effect!depends!on!each!other’s! values.!There!is!interaction!when!the!effect!of!the!dependent!variable!depends!on!an! independent!variable!which!values!depend!on!another!independent!variable!(Ai!&!Norton,! 2003).!Mehlum!et!al.!(2006)!introduced!the!interaction!term!between!natural!resource! abundance!and!institutional!quality.!This!thesis!adjusts!their!interaction!term!in!order!to! focus!on!fossil!fuels!and!help!answer!the!research!question!of!this!thesis.!Therefore!the! interaction!term!becomes:!E!FGH$IFEJ!8FGHK = MJNNEO8MPGO8$&P!Q$!IG ∗ [E!NFEFPFEJ!$O8RP$OEFS].!This!specific!interaction!term!is!straightforwardly!mentioned! ‘interaction!term’!throughout!this!thesis.!According!to!Mehlum!et!al.!(2006)!“the!interaction! term!captures!the!essence!of!(…)!the!prediction!that!resource!abundance!is!harmful!to! growth!only!when!the!institutions!are!grabber!friendly.”!! ! Since!there!are!three!different!variables!that!measure!institutional!quality!there!also! are!three!different!interaction!terms.!One!for!the!combination!of!fossil!fuel!abundance!and! each!of!the!institutional!quality!measurements.!The!interaction!term!for!fossil!fuel! abundance!and!the!first!institutional!quality!term!can!be!found!as!INTERACTION!in!the! appendix.!The!interaction!terms!for!fossil!fuel!abundance!and!the!second!and!third! institutional!quality!terms!are!respectively!named!INTERACTIONA!and!INTERACTIONB.! ! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 9!Measures!public!sector!corruption!from!0!to!100.!!
Control%Variables%
Initial%income%level% Initial!income!level!is!the!first!variable!that!helps!to!control!for!economic!performance.!Initial! income!level,!or!initial!GDP,!is!included!to!show!a!country’s!starting!point.!A!country!with!a! high!initial!income!level!can!be!assumed!as!a!country!that!already!has!a!high!level!of! economic!performance.!Countries!with!a!low!level!of!initial!income!still!have!a!lot!to!‘learn’! and!improve!and!therefore!their!GDP!growth!can!differ!from!countries!with!high!initial! income.!Thus!by!stating!initial!income!levels!the!differences!between!countries!can!be! shown.!A!low!initial!income!level!means!a!low!GDP!at!the!starting!point.!This!does!not! necessarily!say!anything!about!a!country’s!economic!growth!per!year.!However,!countries! with!lower!initial!income!levels!are!usually!the!less!developed!countries.!These!less! developed!countries!can!grow!overtime,!normally!faster!than!already!developed!counties.! Their!real!GDP!per!capita!growth!percentage!thus!can!be!higher!than!for!‘richer’!countries! (Sachs!and!Warner,!1997b).!Therefore,!one!needs!to!know!the!initial!income!level!in!order!to! understand!the!dependent!variable!GDP!per!capita!growth.!Reasons!that!a!less!developed! country!can!experience!higher!growth!than!the!richer!developed!countries!is!because!they! have!lower!wages,!lower!production!costs!(think!of!primary!resources),!lower!diminishing! returns!and!they!can!make!an!example!out!of!the!developed!countries.!Technologies!are! already!created!so!the!developing!countries!can!copy!existing!ideas!and!make!it!their!own,! without!having!to!invest!in!as!much!research!costs!as!for!the!initial!invention.!In!other! words,!initial!income!level!or!initial!GDP!can!be!seen!as!a!variable!to!explain!and!control!for!a! country’s!GDP!per!capita!growth.!The!base!year!is!1970,!as!most!data!was!available!from! 1970!on.!For!some!countries!there!is!no!data!on!their!GDP!level!in!the!seventies,!they!will!be! excluded!in!this!regression!in!order!to!keep!the!outcome!as!accurate!as!possible.! Initial!income!level!is!measured!as!real!GDP!from!national!accounts!in!1970!divided! by!the!population!in!1970.!Initial!income!level!can!be!found!in!the!appendix!as!IIL.! ! Openness% Whether!a!country!has!a!weak!or!strong!economy!has!an!effect!on!its!economic! performance.!The!value!of!openness!of!a!country!shows!the!influence!of!international!trade! on!its!domestic!activities.!These!domestic!activities!affect!economic!performance.!The!higher!a!country!scores!on!openness!the!stronger!its!economy!will!be!(Knack!and!Keefer,!1995).!The! strength!of!an!economic!affects!a!country’s!GDP!per!capita!growth.!As!stated!by!Harrison! (1996)!initial!growth!models!created!by!neoclassical!economists!stated!that!economic! growth!was!not!affected!by!its!openness!to!international!trade.!However,!he!explains,!newer! growth!theories!do!show!that!technological!change!and!thus!an!economy’s!growth!is! affected!by!trade!policies!in!the!long!run.!Trade!gives!access!to!new!technology,!access!to! unknown!products,!knowledge!and!a!bigger!market,!which!can!increase!income,!innovation! and!the!opportunity!for!more!research!(Harrison,!1996).!An!illustration!of!openness!is!given! by!Barro!and!Sala_I_Martin!(1995)!in!Edwards!(1998).!When!considering!a!two_country!world! with!a!developed!(advanced)!country!and!a!developing!country,!the!developing!country!can! follow!the!developed!country!by!means!of!trade,!if!both!countries!are!open.!The!advanced! country!will!have!the!knowledge,!technologies!and!opportunity!to!innovate.!The!developing! country!can!follow!the!developed!country!and!therefore!mainly!has!to!deal!with!the! imitation!costs!only.!Assuming!that!the!costs!of!imitation!are!lower!than!the!costs!the! developing!country!has!to!make!to!do!extensive!research,!the!developing!country!has!the! opportunity!to!grow!faster!than!the!developed!country.!However,!if!both!or!one!of!the! countries!score!low!on!openness,!there!will!be!fewer!opportunities.!This!results!in!a!country! that!still!wants!to!develop!and!probably!a!developed!country!that!misses!an!extensive! market!(Edwards,!1998).!“More!open!countries!have!a!greater!ability!to!capture!new!ideas! being!developed!in!the!rest!of!the!world”!(Edwards,!1998,!p.2).!These!new!ideas!affect!a! country’s!resource!allocation,!specialization,!comparative!advantage!and!thus!economic! growth!(Sachs!&!Warner,!1995b).!! The!original!openness!variable!in!this!thesis!is!measured!by!the!amount!of!years!that! a!country!is!open!for!international!trade!from!1970!until!1992.!If!a!country!is!open!for! international!trade!is!based!on!criteria!from!Sachs!and!Warner!(1995b).!A!country!has!to! have!(1)!reasonable!low!tariffs!and!quotas!with!an!average!rate!below!40%;!(2)!average! quota!and!licensing!coverage!of!imports!of!less!than!40%;!(3)!a!black!market!exchange!rate! premium!of!less!than!20%;!(4)!no!extreme!controls!(taxes,!quotas,!state!monopolies)!on! exports;!and!(5)!not!be!considered!a!socialist!country!by!the!standard!in!Kornai!(1992).!If!a! country!fails!one!of!these!criteria!then!it!is!assumed!that!the!country!“operates!in!substantial! isolation!from!the!world!economy”!(Sachs!&!Warner,!1995b,!p.!7).!A!country!that!is! administered!as!open!during!all!years!from!1970!up!to!1992!gets!a!value!of!1.!The!countries!
that!do!not!satisfy!the!criteria!during!any!of!the!years!get!a!value!of!0.!The!data!used!is! provided!in!Sachs!and!Warner’s!1997b!paper.!The!data!is!available!up!to!1992,!therefore!the! values!for!this!variable!are!based!on!the!years!1970!to!1992!instead!of!up!to!2014!as!are!the! other!variables.!It!is!possible!that!countries!do!not!satisfy!the!criteria!in!earlier!years,!but!do! in!the!last!couple!of!years.!For!example,!countries!that!were!open!half!of!the!time!(eleven! years)!will!get!a!score!of!0.5.!! The!variable!for!the!original!openness!term!can!be!found!as!OPEN!in!the!appendix.!! Because!there!are!missing!values10!for!the!original!openness!variable!an!additional!variable!is! included.!This!additional!openness!variable!states!the!average!trade!percentage!of!GDP!(sum! of!exports!and!imports!of!goods!and!services)!from!1970!until!2014!as!provided!by!The! World!Bank!and!can!be!found!as!OPENTRADE!in!the!appendix.!! ! Investment% Whether!a!country’s!economic!performance!can!grow!depends!on!their!opportunities.! Investment!creates!the!opportunity!to!innovate!and!innovation!is!needed!to!increase!a! country’s!technology!level!and!thus!its!output!and!GDP.!Higher!levels!of!investment!will! therefore!affect!the!dependent!variable!GDP!per!capita!growth.!More!investment!means! more!opportunities,!not!only!for!technology!but!also!welfare!in!general.!Investments!can!be! used!to!increase!healthcare,!public!places,!create!employment!or!an!increase!in!government! spending!that!could!lead!to!more!output.!An!increase!in!government!spending!will!increase! aggregate!demand,!aggregate!supply!and!productive!capacity!and!therefore!economic! growth.!Thus!investment!can!improve!productivity!and!productivity!increases!a!country’s! competitiveness.!Investment!is!considered!one!of!the!factors!with!the!biggest!impact!on! income!and!economic!growth!(Blomstrom,!Lipsey!&!Zejan,!1993).!Blomstrom!et!al.!(1993)! quote!a!study!by!Levine!and!Renelt!(1992)!that!measured!the!effect!of!different!variables!on! GDP!growth.!The!correlation!between!investment!and!GDP!growth!had!one!of!the!most! robust!outcomes!and!confirms!earlier!studies.!! Investment!is!measured!as!the!ratio!of!GDP!that!is!privately!and!publicly!invested,! known!as!gross!capital!formation!(%!of!GDP).!Formerly!gross!domestic!investment.!Data!is! retrieved!from!The!World!Bank.!Investment!can!be!found!as!INVESTMENT!in!the!appendix.! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 10!See!summary!statistics!and!the!section!about!missing!values!in!the!appendix.!
! Landlocked% A!reason!for!poor!economic!performance!could!be!a!country’s!geography!or!climate,! moreover!‘natural!factors’!(MacKeller,!Wörgötter!&!Wörz,!2000).!A!geographical! characteristic!that!can!affect!a!country’s!growth!is!the!location!of!a!country.!If!a!country!lays! in!a!remote!location!with!no!access!to!international!waters,!it!will!experience!higher! transport!costs.!A!country!that!is!surrounded!by!other!countries!has!to!pay!road!transport! costs!in!order!to!be!able!to!ship!their!products.!Landlocked!countries!are!dependent!on!their! neighbouring!countries!in!order!to!trade!since!they!have!to!pass!their!borders!for!transit.! Besides!the!transport!costs!there!is!the!possibility!of!inadequate!infrastructure,!delayed! border!crossing,!cartels!in!the!trucking!industry,!multiple!clearance!processes,!uncertainty! and!high!import!and!exports!requirements!(World!Bank,!2008).!In!order!words,!landlocked! countries!have!to!pay!more!and!wait!longer!in!order!to!import!and!export.!This!makes! transporting!inefficient,!consequently!they!miss!out!on!the!opportunity!of!a!bigger!market.! Air!transport!is!not!always!possible.!Especially!transporting!fossil!fuels!by!airplanes!is!too! risky.!According!to!the!International!Monetary!Fund!(2015)!there!are!166!developing! counties.!31!of!them!are!landlocked!and!16!of!them!belong!to!the!poorest!countries!of!the! world.!Arvis,!Marteau!and!Raballand!(2010)!reveal!that!37%!of!the!low!income!countries!are! landlocked,!whereas!only!8%!of!high!income!countries!are!landlocked.!Reasons!for!these! differences!are!that!landlocked!countries!trade!about!30%!less!than!countries!with!access!to! international!waters.!Another!reason!is!that!they!experience!their!growth!being!reduced!by! about!1.5%!(Mackellar!et!al.,!2000).!Besides!that,!transportation!costs!can!be!50%!higher!for! landlocked!countries!than!for!countries!that!do!have!access!to!international!waters!(Nuno!&! Venables,!1999).!! A!dummy!variable!shows!when!a!country!does!have!access!to!international!waters! with!the!value!1,!and!when!a!country!is!landlocked!with!value!0.!Landlocked!can!be!found!as! LANDL!in!the!appendix.! ! Savings% What!a!country!does!with!its!money!affects!its!economic!growth.!Whether!or!not!a!county! has!reserves!affects!economic!growth!as!well,!even!though!the!money!might!not!be!used!in!
ways!that!its!citizens!will!notice.!If!a!country!is!not!able!to!recover!from!unforeseen! situations!it!will!not!be!able!to!increase!(or!maintain)!their!economic!performance!level.! Since!gross!savings!can!differ!across!countries!it!could!be!a!reason!for!different!economic! growth!across!countries.!The!traditional!Solow!growth!model11!shows!that!higher!savings! lead!to!a!higher!level!of!income.!Countries!with!lower!(foreign)!debts!have!the!opportunity! to!use!their!money!to!increase!their!savings!level.!Especially!after!international!debt!crises!it! is!a!popular!choice!to!increase!a!country’s!rate!of!savings!(Mason,!1988).!Other!variables!in! this!chapter!already!stated!the!importance!of!technology!for!economic!growth.!In!order!to! improve!a!country’s!technology!level,!it!has!to!invest.!As!stated!by!Mason!(1988)!and!Lewis! (2013)!a!country’s!savings!level!is!related!to!its!investment!level.!If!a!country!does!not! necessarily!need!its!money!to!pay!off!debts!it!can!use!the!money!to!free!up!resources!that! help!the!productive!capacity.!Basically!you!could!say!that!a!country!with!a!high!level!of!gross! savings!(as!a!percentage!of!GDP)!has!a!higher!capital!per!worker,!higher!labour!productivity! and!wages!and!a!higher!per!capita!income!than!other!countries!(Mason,!1988).!This!lead!to!a! higher!GDP!per!capita.!It!would!be!ideal!if!a!distinction!between!government!and!private! saving!could!be!made,!since!the!public!does!not!change!their!saving!or!spending!pattern! based!on!a!country’s!debt.!But!there!is!no!adequate!data!for!these!two!sources.!However,! since!there!is!a!strong!correlation!between!governmental!and!private!saving!the!data!on! gross!savings!can!be!used!(Mason,!1988).!The!interpretation!of!economic!growth!and!the! level!of!savings!might!be!hard.!Caroll!and!Weil!(1994)!quote!previous!literature!(Modigliani,! 1970;!Baumol,!Blackman!&!Wolf,!1991;!Deaton!&!Paxson,!1992;!Bosworth,!1993)!that!finds! that!it!is!likely!that!a!higher!income!increases!saving!and!not!the!other!way!around.!They! also!state!that!economic!growth!increases!saving!but!saving!does!not!increase!economic! growth.!One!cannot!assume!that!savings!always!are!invested!(Lewis,!2013).!Besides!using! savings!to!invest!it!is!also!important!to!speed!up!economic!recovery!after!unforeseen!shocks! and!economic!woes.!This!all!can!be!assumed!to!affect!a!country’s!economic!growth.!! ! Gross!savings!as!a!percentage!of!GDP!consists!of!the!gross!national!income!minus! total!consumption,!plus!net!transfers,!measured!as!a!fraction!of!GDP.!Gross!savings!is!also! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 11!The!Solow!growth!model!studies!economic!growth!in!a!country!over!time.!According!to! this!model!there!are!two!reasons!for!economic!growth:!population!growth!and!the!rate!of! saving!(Mankiw,!Romer!&!Weil,!1990).!!!
known!as!gross!national!savings!and!can!be!found!in!The!World!Bank.!The!variable!that! measures!a!country’s!savings!level!can!be!found!as!SAVINGS!in!the!appendix.!! ! Inflation% Whether!or!not!citizens!have!a!lot!to!spend!is!another!reason!for!a!country’s!economic! performance!level.!One!way!spending!habits!of!the!public!are!affected!is!the!level!of! inflation!in!a!country.!A!higher!price!level!means!that!the!public!has!less!to!spend!when!their! income!levels!do!not!increase!by!the!same!rate.!This!would!lead!to!a!lower!demand,!less! output!and!less!investment,2!concluding!in!a!decrease!or!stagnation!of!a!country’s!GDP.!High! inflation!could!especially!affect!economic!growth!in!developed!countries!(Kremer,!Bick!&! Nautz,!2013).!Kremer!et!al.!(2013)!state!that!an!inflation!rate!of!more!than!2.5%!is!harmful! for!economic!growth!in!the!long!run!whereas!this!could!be!too!low!for!developing!countries! to!be!harmful.!For!developing!countries!an!inflation!rate!above!17.2%!negatively!affects! economic!growth.!Nonetheless,!in!general!regarding!developed!and!developing!countries!it! can!be!assumed!that!inflation!is!negatively!associated!with!economic!growth!(Law!&!Singh,! 2014).!It!can!be!argued!(Bick,!2010)!that!a!low!growth!in!inflation!rates!has!a!positive!effect! on!economic!growth.!That!it!only!becomes!harmful!when!the!inflation!rate!increases!too! much.!In!that!case!the!impact!of!inflation!can!be!assumed!as!having!a!U_shape.!Inflation!can! also!affect!a!country’s!unemployment!rate.!An!employment!rate!that!is!too!low!can!be! harmful!since!it!could!lead!to!a!distortion!of!supply!and!demand.!This!leads!to!inefficiency! and!inefficiency!affects!the!economic!performance!of!a!country!(Fatás!&!Mihov,!2013).!! ! The!data!used!is!“inflation!as!measured!by!the!consumer!price!index!that!reflects!the! annual!percentage!change!in!the!cost!to!the!average!consumer!of!acquiring!a!basket!of! goods!and!services!that!may!be!fixed!or!changed!at!specified!intervals,!such!as!yearly”!(The! World!Bank,!n.d.).!The!variable!for!inflation!can!be!found!as!INFLATION!in!the!appendix.!!
!
%
Summary%Statistics
%
The!main!focus!of!this!thesis!is!to!test!the!relationship!between!the!dependent!variable!GDP! growth!per!capita!and!the!independent!variables!fossil!fuel!abundance!and!institutional! quality.!The!dependent!variable!is!controlled!for!by!several!explanatory!variables.!This! section!explains!the!descriptive!statistics!of!all!variables.! ! Sample%size% The!aim!of!this!thesis!is!to!get!a!worldwide!result,!not!just!a!continent!or!a!couple!of! countries!(i.e.!Africa!in!Sachs!and!Warner!1997b).!Therefore,!the!only!reason!to!eliminate! countries!of!the!sample!is!when!the!data!for!the!dependent!variable!GDP!per!capita!growth! is!not!available,!or!when!data!for!more!than!half!of!the!other!variables!is!not!available.!The! sample!size!started!with!182!countries!for!which!GDP!growth!is!available.!Of!those!countries! 44!are!European!countries,!41!from!Asia,!52!African!countries,!31!countries!from!North_ America!and!11!countries!from!South_America.!Fossil!fuel!abundance!is!one!of!the!main! variables.!There!is!data!available!on!fossil!fuel!production!for!69!countries.!This!thesis! assumes!that!BP!has!data!on!all!fossil!fuel!producing!countries.!Therefore,!it!is!assumed!that! there!are!no!more!than!69!countries!that!have!fossil!fuels!in!their!soil!and!the!opportunity!to! extract!these!fossil!fuels.!These!countries!are!all!included.!In!table!2!the!fossil!fuel!producing! countries!are!marked!with!a!number.!Number!1!means!they!produce!oil,!2!is!for!gas!and!3!is! for!coal!production.!! ! Table'2.'Countries'by'continent.'The'numbers'show'what'kind'of'fossil'fuels'they'produce,'1'=' oil,'2'='coal,'3'='gas.'''Europe% Asia% Africa% NorthWAmerica% SouthWAmerica% Albania! Azerbaijan!12! Algeria!12! Anguilla! Argentina!12! Armenia! Bahrein!2! Angola!1! Antigua!And!Barbuda! Bolivia!2!
Austria! Bangladesh!2! Benin! Aruba! Brazil!123!
Belarus! Bhutan! Botswana! Bahamas! Chile!
Belgium! Brunei!Darussalam!12! Burkina!Faso! Barbados! Colombia!123! Bosnia!And!Herzegovina! Cambodja! Burundi! Belize! Ecuador!1!
Bulgaria!3! China!123! Cabo!Verde! Bermuda! Paraguay!
Croatia! China,!Hong!Kong!Sar! Cameroon! British!Virgin!Islands! Peru!12! Cyprus! China,!Macao!Sar! Central!African!Republic! Canada!123! Suriname! Czech!Republic!3! India!123! Chad!1! Cayman!Islands! Uruguay!
Denmark!12! Indonesia!123! Comoros! Costa!Rica! Venezuela!123!
Estonia! Iran!12! Congo!1! Curacao! Total!
Finland! Iraq!12! Côte!D'ivoire! Dominica! 11!
France! Israel! D.R.!Of!The!Congo! Dominican!Republic! !
Georgia! Japan!1! Djibouti! El!Salvador! !
Germany!23! Jordan! Egypt!12! Grenada! !
Greece!3! Kuwait!12! Equatorial!Guinea!1! Guatemala! %
Hungary!3! Kyrgyzstan! Ethiopia! Haiti! %
Iceland! Lao!People's!Dr! Gabon!1! Honduras! Other!
Ireland! Lebanon! Gambia! Jamaica! Australia!123!
Italy!12! Malaysia!12! Ghana! Mexico!123! Fiji!
Kazakhstan!123! Maldives! Guinea! Montserrat! New!Zealand!3!
Latvia! Mongolia!3! Guinea_Bissau! Nicaragua! !
Lithuania! Myanmar!2! Kenya! Panama! !
Luxembourg! Nepal! Lesotho! Saint!Kitts!And!Nevis! !
Malta! Oman!12! Liberia! Saint!Lucia! !
Montenegro! Pakistan!23! Madagascar! Sint!Maarten! ! Netherlands!2! Palestine! Malawi! St.!Vincent!And!The!Grenadines! ! Norway!12! Philippines! Mali! Trinidad!And!Tobago!12! ! Poland!23! Qatar!12! Mauritania! Turks!And!Caicos!Islands! ! Portugal! Republic!Of!Korea!3! Mauritius! United!States!123! ! Republic!Of!Moldova! Saudi!Arabia!123! Morocco! ! !
Romania!123! Singapore! Mozambique! ! !
Russian!Federation!123! Sri!Lanka! Namibia! ! !
Serbia!3! Taiwan! Niger!12! ! !
Slovakia! Tajikstan! Nigeria! ! !
Slovenia! Thailand!123! Rwanda! ! !
Spain!3!
United!Arab!Emirates!12! Sao!Tome!And!Principe! ! !
Sweden! Uzbekistan!123! Senegal! ! !
Switzerland! Viet!Nam!123! Seychelles! ! !
Tfyr!Of!Macedonia! Yemen!12! Sierra!Leone! ! !
Turkey!3! ! South!Africa!3! ! ! Ukraine!23! ! Sudan!1! ! ! United!Kingdom!123! ! Swaziland! ! ! ! ! Syria!12! ! ! ! ! Togo! ! ! ! ! Tunisia!1! ! ! ! ! Turkmenistan!12! ! ! ! ! U.R.!Of!Tanzania! ! ! ! ! Uganda! ! ! ! ! Zambia! ! ! ! ! Zimbabwe!3! ! !
Total! Total! Total! Total! Total!
44! 41! 52! 31! 3!
Descriptive%statistics% This!section!shows!how!the!observations!in!the!variables!are!spread.!The!mean!and!standard! deviation!show!the!averages!and!how!spread!out!the!data!is.!Min!and!max!respectively!show! the!lowest!and!highest!values.!The!median!shows!the!centre!of!the!variables,!where!the!first! half!is!separated!from!the!second!half.!Summary!statistics!of!the!original!variables!can!be! found!in!table!3.!Statistics!for!variables!that!had!to!be!altered!can!be!found!in!table!4.! The!observations!for!GDP!growth!are!normally!distributed.!The!min!and!max!do!not! differ!that!much!and!the!mean!and!median!even!are!the!same.!! For!fossil!fuel!abundance!one!sees!the!opposite.!There!is!a!very!wide!spread!range! with!a!rather!low!mean!and!median!when!looking!at!the!max.!This!could!indicate!that!there! are!some!outliers12.!Further!information!on!outliers!can!be!found!in!the!appendix.!Table!4! shows!the!statistics!for!fossil!fuel!abundance!without!outliers.!There!still!is!some!deviation.! Because!of!the!deviation!a!log!variable!for!fossil!fuel!abundance!is!created.!Taking!the!log! helps!reducing!skewness!to!the!right!(Field,!2013).! The!observations!for!initial!income!level!are!the!widest!spread!of!all!variables.!The! min!is!very!low!whereas!the!max!is!very!high.!The!mean,!standard!deviation!and!median! support!this!deviance.!When!taking!out!the!outliers!there!still!is!no!normal!distribution,!as! can!be!seen!in!table!4.!However,!taking!the!log!of!the!variable!makes!the!distribution!more! normal.!! The!original!openness!term!only!provides!values!for!102!countries.!Since!this!limits! the!sample!size!an!additional!variable!with!172!observations!to!measure!openness!is! included.!Summary!statistics!of!the!additional!openness!variable!can!be!found!in!table!4.! Whereas!the!original!openness!term!is!scaled!from!zero!to!one,!the!additional!term!can!go! up!to!infinity!(342.84!in!this!case).!The!second!openness!variable!without!outliers!is!still! skewed.!Therefore,!a!log!is!created.!The!log!for!the!second!openness!term!gives!a!normal! distribution.!! Investment!is!already!normally!distributed.!However,!there!is!one!outlier!with!a! higher!value.!This!outlier!is!omitted!to!create!a!normal!distribution.!! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 12!Tests!indeed!show!that!China,!Russia,!Saudi!Arabia!and!the!United!States!are!outliers.!See! appendix.!!
