OIL CURSE AND INSTITUTIONAL CHANGES: WHICH INSTITUTIONS ARE MOST VULNERABLE TO THE CURSE AND UNDER WHAT CIRCUMSTANCES?

I. INTRODUCTION The popular proposition that a large natural resource endowment (especially of oil) constitutes a "curse" on growth and development, or more broadly on human welfare, has been examined rather extensively, both theoretically and empirically. Some robust empirical results were presented by Sachs and Warner (1997, 2001) and Ross (2001, 2012), among others. Indeed, Doppelhofer, Miller, and Sala-i-Martin (2000) asserted that the negative effect of oil dependence on economic growth is one of the most robust empirical relationships in the entire empirical growth literature. Yet, others (Bachmeier, Li, and Liu 2008; Mehlum, Moene, and Torvik 2006a) have come to almost the opposite conclusion showing that oil price and export movements are very poor predictors of economic activity and that the magnitude and direction of the relation between oil dependence and growth depends heavily on institutional characteristics which may differ from country to country and over time. To the extent that the effect of oil on growth depends on institutions, however, this may suggest that the growth relation is only an indirect one coming through oil's effects on these institutional channels, with different institutional channels possibly affecting growth in different directions. Among the most frequently cited institutional links are property rights, the incentives or disincentives to accumulate human and physical capital, the ability to control volatility in economic activity, quality of governance, the ability to ward off conflicts, and to manage real exchange rates (and hence international competitiveness in tradable goods) and corruption (van der Ploeg 2011). Hence, both the validity of the oil curse and understanding how it works may depend on what oil resources do to the development of different institutions. As explained in Section II, in view of the extremely slow pace of change typical of most institutions, the vast majority of studies on these links have concentrated on a single link, most commonly democratic governance, and have largely relied on international cross section analysis, relating oil or other natural resource endowments to the quality of institutions (usually a democracy index) at a point in time. (1) Some exceptions to this generalization are discussed below. Most studies comparing the effects of different types of natural resource abundance on growth have identified an abundance of oil as having the most adverse effects, and institutions as the most important factors affecting the magnitude and direction of these effects (Acemoglu, Johnson, and Robinson 2001; Acemoglu and Robinson 2006a, 2006b; Nunn 2008). Thus, our objective is to examine whether or not oil can raise or lower the institutional quality indicators of any of the types that may serve as important links between resource abundance and economic growth. Instead of examining the relationship between levels of oil resource abundance and levels of institutional quality, we examine the effects of oil on changes in institutional quality. We examine the effects of oil abundance on changes in each of 13 different institutional indicators (for which appropriate indicators exist over time), including bureaucratic quality, corruption, law and order, resistance to ethnic tension, internal conflicts, external conflicts, government stability, investment profile, and socioeconomic conditions. We also examine the effects of oil abundance on four dimensions of governance: democracy, polity, regulations on executive recruitment, and constraints on the executive. Additionally, we wish to examine the sensitivity of these institutional outcomes to alternative measures of both oil abundance and experience in the oil industry and to possible interactions between the two. These are all factors that have been suggested as being relevant either to institutional change or to the effects of oil on growth. As the various measures of oil abundance/dependence used in the literature have been subjected to criticism for concerns of endogeneity, thereby biasing the estimated effects in one direction or another, we devote considerable effort to testing for endogeneity and reducing it as much as possible. …