Does bad company corrupt good character? A spatial econometric analysis of oil resource management in Africa

Abstract

A widely held belief before the 1990sreferred to as the oil-blessing hypothesiswas that oil discovery and production should promote economic growth and development, and lead to poverty reduction. However, the so-called 'oil-curse' hypothesis, postulated by Sachs and Warner in 1995, challenged this belief, thus provoking a heated debate on the theme. The oil-curse hypothesis has been traditionally tested by means of cross-sectional and panel-data models. We go beyond these traditional methods to test whether the presence of spatial effects can alter the hypothesis in oil-producing African countries. In particular, the effects on economic growth of oil production, oil resources and oil revenues along with 3 the quality of democratic institutions, investment and openness to trade are investigated. Our findings are as follows. First, the validity of the spatial Durbin model is vindicated. Second, consistently with the oil-curse hypothesis, oil production, resources, rent and revenues have a negative and generally significant effect on economic growth. This result is robust for across the panel data, spatial durbin, and spatial autoregressive models, and for different measures of spatial proximity between countries. Third, we find that the extent to which the business environment is perceived as benign for investment has a positive and marginally effect on economic growth. Additionally, economic growth of a country is further stimulated by a spatial proximity of a neighbouring country, if the neighbouring country has created strong institutions protecting investments. Fourth, openness to international trade has a positive and marginally significant effect on economic growth. However, the significance of the parameter estimate is sensitive to the model that is being considered. Overall, the findings suggest that oil-producing African economies are cursed by oil discovery, production and revenues rather than by the spatial proximity with their neighboring countries.