Does governance matter in mediating the resource curse? Evidence from Zambia

Abstract

The objective of this study is to empirically examine the short and long-run relationship between natural resource rent, economic growth, governance mechanisms based on the Polity IV, gross capital formation, inflation, and population in Zambia over the period 1986–2018. This study employs the autoregressive distributed lag model (ARDL) to estimate the underlying long-run and short-run relationships between the variables. The study uses three proxies of governance quality, namely autocracy, executive recruitment, and democracy, and estimates three regression models. Furthermore, interaction terms are included to explore how different forms of governance quality influence the economic impact of natural resources. The results confirmed a long-run equilibrium relationship among the variables included in the estimated models. The results further show that the impact of natural resource rents on economic growth depends on the model specification. It is also time-variant, depending on whether the model is estimated in the short run or the long run. Overall, our results do not support the existence of the resource-curse phenomenon in Zambia, regardless of the time frame considered. Instead, the results indicate that natural resources have the potential to spur economic growth in the short run when both executive recruitment and democracy are used as governance proxies, and in the long run when democracy is used. The results also show that governance modulates the impact of natural resource rents on economic growth, but only when proxied by democracy. However, the findings vary depending on the timeframe. While democracy positively influences growth through natural resources in the long run, it has adverse effects in the short run. The results of the study suggest that policymakers in Zambia should enact cautious measures that encourage responsible approaches to utilizing natural resource rents to foster sustainable economic growth. This involves using natural resource rents to boost human and physical capital, as well as diversify the economy.