Natural Resources Abundances and Economic Growth in Latin America 1996-2010

Abstract

Based on the Sachs and Warner model (1995), this paper presents the impact of primary exports on economic growth. The results are interpreted as the role that natural resources abundance (measured as Total Natural Rents) play in determining the pace of economic development. The study is focused on 26 different Latin American Countries between 1996-2010. We find that the Foreign Direct Investment flows (measured as their share of the recipient countries GDP) have a positive and significant relationship with the countries economic development (measured as the Income per Capita Growth Rates). This refers to inflows of FDI without specific regard to the destination sector. However it serves as a preliminary symptom on the countries capability to absorb the expected spillovers that arise from the economic exchange. For the most part, diversification still appears as one of the regions most daunting challenges. Succeeding in this endeavor will deepen the regional protection from commodity export price volatility. Large endowments of natural resources also proved to have a positive and significant relationship with the countries economic performance. This result contradicts the broadly accepted knowledge about the generalized prevalence of the Resource Curse theory

according to which, the presence of large endowments of natural resources will have a negative relation with the countrys rate of economic growth. Hence, countries with abundant natural resources should display slower economic development. However, this paper has contributed to prove that the sole presence of natural resources is not enough explanation for the countrys economic success or failure. In reality, any given outcome depends from the interaction of at least a number of key factors, which warrant detailed analysis, in order to determine a countrys capability to benefit from its natural wealth. In summary, it can be concluded that the Resource Curse is not an inevitable fate for resource abundant countries. In reality, it is latent risk, avoided only through skillful implementation of various policies that can protect the economy from the thread of unmanaged natural revenues. Nonetheless, those necessary policies are not easy to arrange and are set specially at risk by the sole presence of abundant natural endowment. In essence, these results were then analyzed in the light of the relevant theories. Four main elements were identified as key actors to determine the existence of the Resource Curse: education, quality of institutions, level of diversification measured as the development of the manufacturing sector, and the soundness of monetary policy expressed as the management of real exchange rates.