Pro-Market Economic Reforms and Resource Curse: Do Initial Conditions Matter?

Abstract

The quality of economic institutions plays a crucial role in enhancing a country's economic performance, leading international organisations to recommend pro-market institutional reforms as a strategy to support economic development. This paper investigates how the natural resource curse affects pro-market reforms, analysing a sample of 90 developed and developing economies from 1973 to 2014. Using the local projection method, we analyse the dynamics effects of pro-market policies following increases in natural resource rents. Our findings reveal that increasing in resource rents significantly hinder the implementation of pro-market reforms, with this negative effect becoming apparent in the first year and persisting into the short and medium terms. We further explore the nuances of these dynamics across various types of resources, identifying oil rents as particularly obstructive to reform efforts, whereas forest rents exhibit a transient positive effect in the initial years. Our analysis is bolstered by robustness checks and alternative specifications, reinforcing the conclusion that dependence on natural resource rents presents substantial challenges to the adoption of pro-market reforms, particularly in developing countries characterised by weaker institutions and economic vulnerabilities.