The Resource Experience:

Natural Resource Dependency and its Effects on Growth Stability in the Developing Nations of Africa
KATHERINE ANNE DOERR 15 NOVEMBER 2013

Introduction
Hypothesis: Overreliance on a point source resource for the majority of a nations income severely effects the volatility of growth for that country. Independent Variable: Natural Resource Dependence Dependent Variable: Economic Growth Stability Export Structure is given: those countries with oil will export oil, while those countries with the climate for cocoa and coffee will export cocoa and coffee.

Both a Time Series & Cross Sectional Analysis

Y = 0 + 1x1 + 2x2 + 3x3 + 4x4 + 5x5 + 6x6 + 7x7 + 8x8

Why is this Study Important?

Countries can use this information to understand the need for export diversification to stabilize growth for future generations

Stable countries are easier to govern, and therefor prevent the rise of corrupt political parties.
Prices will become more stable, and people will be able to plan for the future through investments and savings Countries will be able to better handle economic shocks. Unemployment will stay near the natural rate of 4%.

Dependent Variable: Economic Growth Stability

Time Series Data Source: World Bank for the Annual Real GDP Growth 2005-2012 Using standard deviation of GDP from 2005-2012 to represent Economic Growth Stability

Results are shocking: Anywhere from .43 for Mozambique to 11.44 for Zimbabwe.

Calculating Standard Deviation of GDP Highlighted Yellow Indicates a Deviation of Above 3

Independent Variable: Natural Resource Dependence

Source: The Observatory of Economic Complexity effort between MIT Lab and Center for International Development at Harvard University
Very Little Diversification Is Unhealthy!!

Commodity Price Volatility Oil

Literature Review:

The Varieties of the Resource Experience: Natural Resource Export Structures and the Political Economy of Economic Growth

Isham, Woolcock, Pritchett, & Busby

2008

Natural Resource Abundance in Nigeria: From Dependence to Development 2005 Eric Ogunleye Volatility and the Natural Resource Curse Frederick van der Ploeg and Steven Poelhekke

2005

The Differences
Compares the majority of the African countries against one another as a means to determine resource dependence on economic stability. Uses the most recent data available. Political stability is not the dependent variable in this study, but rather stands as a control variable in the model. I am not looking to reject, but rather support, the notion of the resource curse.

Model
Y = 0 + 1x1 + 2x2 + 3x3 + 4x4 + 5x5 + 6x6 + 7x7 + 8x8
Independent variable

Y = Standard Deviation of GDP

Dependent Variable

X1 = Average Resource Dependency X2 = Corruption Rating

X5 = Inflation Rate X6 = Government Consumption as Percent GDP X7 = Life Expectancy

X8 = Percent Population living bellowing $2 / day

X3 = Government Overhaul (Dummy)

X4 = School Enrollment Primary Percent of Gross

Dummy Variable: Government Overhaul: Example: Zimbabwe

One of the top natural resource endowed countries of Africa. 2000: 80% unemployment due to participation in the war in the Democratic Republic of the Congo from 1998 to 2002 Hyperinflation from 2003 to 2009 until the country suspended its own currency 2008: 94% unemployment due to costly state regulation for hiring and firing - high taxes. Today: has reduced taxes and financial transparency
People still afraid to put their money in banks.

High Real Interest rate due to lack of capital Adopted South African rand coins for sub-dollar transactions

Djibouti I Mozambique I Nigeria I Sudan I Zimbabwe I Zambia

Outliers: Algeria, Ghana & Burkina Faso

No government restricting, yet inverse relationship between growth stability and natural resource dependence No known investments from outside organizations that would buoy growth.

Statistical Output
MEAN STDEV GDP/CAP AVG. RESOURCE DEPENDCY (%) CORRUPTION RATING DUMMY SCHOOL ENROLLMENT 3.03 0.49 33.02 0.15 108.55 MEDIAN 2.30 0.46 31 0 107 RANGE 11.01 0.88 52 1 135 MIN 0.43 0.1 13 0 47 MAX 11.44 0.98 65 1 182

INFLATION RATE (%) GOVT CONSUMPTION

LIFE EXPECTENCY POVERTY (%)
N = 49 African Countries All Variables 2008 Data Except Dummy Variable

8.74 29.16
56.57 62.42

7 26.7
55 69.31

30.9 94.4
27 87.09

1 3.4
48 8.06

31.9 97.8
75 95.15

Lot's of variation

Regression
Regression
Intercept

R^2 = 0.105 Standard Error

1.36 3.29 0.78 1.41

Coefficients

t Stat
1.75 2.33

P-value
0.09 0.02

Average Resource Dependency

N = 49 African Countries All Variables 2008 Data Except Dummy Variable

Hypothesis Independent Variable Significant

Accept the Null Hypothesis

Regression
Full Regression Coefficients Standard Error
1.92 1.12 0.03 0.82 0.01 0.02 0.01

R^2 = 0.55 T-Stat

0.67 4.17 -1.62 -3.28 -1.62 5.73 0.79

P-Value
0.87 0.00* 0.11 0.00* 0.11 0.00* 0.43 *Significant at the 1% level

Intercept 0.32 Resource Dependency 4.69 Corruption Rating -0.04 Dummy -2.71 Scholl Enrollment -0.02 Govt Consumption 0.12 % living >/= $2/day 0.01
N = 49 African Countries All Variables 2008 Data Except Dummy Variable

Conclusion
Traditional Regression: R^2 low, however shows some interrelatedness
high correlation solely between resource dependency and growth stability

extremely low p-value signifies significance at the one percent level, and that we will not reject the null hypothesis. Traditional Regression with Controls: the R^2 skyrockets. the p-value of natural resource dependency stays consistent at 0.00, indicating that it is significant and does reject the null hypothesis. The p-values of the control variables for the Dummy and for Government Consumption indicate significance at the one percent level.
Support the Null Hypothesis

Improvements to Consider: Why are corruption level, life expectancy and school enrolment having a negative effect on economic growth stability?

Questions
Eritrea Djibouti

Ghana

Benin Equatorial Guinea

Swaziland Lesotho