# **III.  The Elusive Curse**

Without question, many of the channels discussed above may have important implications for growth. However, the question is whether taking all these impacts together, resource abundance has, as a central tendency, curse-like qualities. The literature has used a variety of proxies for resource abundance but has not been able to demonstrate this.

By far, the best known empirical tests for the resource curse are found in the work of Sachs and Warner (1995a, 1997a, 1997b, 1999, 2001a,b) who employ natural resource exports as a share of GDP as their proxy. Using cross sectional data employed previously by Barro (1991); Mankiw, Romer and Weil (1992); and DeLong and Summers (1991) across the period 1970-1990, they persistently find a negative correlation with growth, much to the alarm of many resource abundant developing countries.<sup>6</sup> Yet, this proxy leads to some counterintuitive results as a measure of resource abundance. Singapore, for example, due to its substantial re-exports of raw materials, appears very resource abundant and given its high growth rates, even seems to impart a positive relationship between resource abundance and growth. Because this gross measure is clearly not capturing the country’s true factor endowments, Sachs and Warner replaced the values of Singapore and Trinidad and Tobago with net resource exports as a share of GDP (see data appendix in Sachs and Warner 1997a). It is not clear why net values should only be used for these two cases. Numerous countries in Asia and Latin America have a large presence of export processing zones that would, using the gross measure, overstate their true abundance in manufacturing related factors.<sup>7</sup> The issue turns out to be central to the findings of a curse. When Lederman and Maloney (2007) replicate the Sachs-Warner results using either a net measure of resource exports, or using the gross export measure without the adjustments for the two countries, they find that the negative impact of natural-resource abundance on growth disappears.

In fact, the interpretation of the Sachs Warner results is not clear even using their modified data. Sala-i-Martin et al (2004) in their search for robust regressors across millions of growth regressions find a persistent negative sign when the proxy enters, but it is not robust enough to be considered a core explanatory variable for growth as other variables appear to absorb its influence. In a similar vein, Lederman and Maloney (2007) show that, controlling for fixed effects in a panel context, the negative impact of resources also goes away suggesting that it is not their particular proxy, but its correlation with unobserved country characteristics that are driving the result. Manzano and Rigobón (2007) concur, and argue that the cross sectional result arises from the accumulation of foreign debt during periods when commodity prices were high, especially during the 1970s, that lead to a stifling debt overhang when prices fell. These results, and the analogy to

> 6 The other papers by Sachs and Warner (1995b, 1997b, 1999, 2001a, 2001b) contain the basic results of 1997a, at times using a slightly longer time span (1965-1990 instead of 1970-1989), and often including additional time-invariant explanatory variables such as dummies identifying tropical and landlocked countries, plus some additional social variables.

> 7 The variable also shows substantial volatility over time reflecting terms of trade movements and hence the average for the period is probably a better measure than the initial period value that was used by Sachs and Warner in several of their papers.

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