The Link Between Natural Resource Rents,Public Debt And Economic Growth

Numerous researchers have carried studies on the nexus between natural resource abundance and economic growth to test the validity of the “resource curse” hypothesis.Also,several other studies assessed the correlation between public debt and economic development to confirm the “debt overhang”hypothesis.Due to the significant role natural resource revenue and government borrowings play in the growth model,these topics have been of high interest to researchers over the years,and findings have been inconclusive.Though most macroeconomic variables comprise nonlinear characteristics,the most significant part of the existing research on modelling the natural resource abundance-economic growth and public debt-economic growth relationship is mostly performed in a linear framework that assumes a symmetric relationship.Such linearity assumptions could have been the reason for the mixed results found regarding the natural resource wealth,government debt,and economic growth relationship.Where using linear models might not be a suitable approach in examining the relationship between natural resource abundance,public debt,and economic growth,as it could offer misleading suggestions on such a relationship.Furthermore,excessive borrowing was identified as a significant characteristic of governments of mineral-rich countries,especially developing economies in Sub-Saharan Africa.This phenomenon is often described as natural resource windfall and “boom-based borrowing.” Some studies have noted that a decline in growth rates and increasing foreign debt levels became evident during the period that most countries in the Sub-Saharan region discovered natural mineral resources in commercial quantities and earning significant revenue.A piece of common knowledge is that natural resources serve as an attractive guarantee to secure loans,mainly from the international market and in bilateral loan agreements.Therefore as expected,during resource boom periods,governments of resource-abundant countries in sub-Saharan Africa embarked on a borrowing spree.In most cases,such loans are used to fund political party activities,extravagant expenditure on elections to retain power,and other wasteful spending on unproductive sectors.Extant literature available has shown that very few studies attempted to empirically examine the role of public debts as a transmission channel in explaining the negative effect natural resources have on economic growth termed as “resource curse.”The overall objective of this research is to establish the interdependent relationship between total natural resource rents,public debt,and economic growth in a panel of 17 mineral-rich countries.The sample consists of the top nine mineral-rich countries globally and eight mineral-rich countries in Africa.The econometric analysis conducted was to investigate the nonlinear relationship between total natural resource rents in the top mineral-rich countries globally.The author performed further investigations to determine the correlation between total natural resource rents and public debt in the full sample of 17 mineral-rich countries used for the study.In addition,the link between total natural resources and economic growth integrating the role of public debt was analyzed in the sample of mineral-rich countries in Africa.Finally,the nonlinear connection between public debt and economic growth was evaluated in the full sample of17 mineral-rich countries employed for the research.To the best of the author’s knowledge,this study is among the first to examine the nonlinear relationship between natural resource rents,public debt,and economic growth in top resource-abundant countries.It is also the first to explore the simultaneous effect of natural resource abundance and excessive government borrowing in the study sample.The study is structured in seven parts,with chapter one providing the research background,gaps,objectives,questions,and contributions.Chapter two presents a literature review on the topic,and chapters three,four,five,and six reports the empirical studies.The final section,chapter seven,is for the conclusion of the research.The impact of total natural resource rent on economic growth by applying the Nonlinear Autoregressive Distributed Lag(NARDL)developed by Shin et al.(2014)and nonlinear Granger causality proposed by Diks and Panchenko(2006)in the case of top ten mineral-rich countries in the world for the period1981-2017 analyzed in chapter three.Empirically,after testing the stationarity properties of the variables,the Johansen Cointegration test is applied to examine the long-run linear cointegration relationship between total natural resource rent,trade openness,and economic growth.The causal relationship between the variables investigated by using the conventional Granger Causality Test and the nonlinear Granger causality test.Further employed the BDS Tests to examine the possibility of nonlinear dependence between the variables.The study also tested the robustness of the asymmetric short-and long-run nonlinearities through positive and negative partial sum decompositions of the predetermined explanatory variables using NARDL,which exhibits robustness to small sample sizes.The empirical results confirm nonlinear cointegration between the variables in Australia,Brazil,Canada,The Democratic Republic of Congo(DRC),India,and Saudi Arabia.Long-run asymmetric effect results show that total natural resource rent has an adverse effect on economic growth in Australia,DRC,and India,therefore,confirming the "resource curse" phenomenon in these countries.However,results revealed that natural resource rent has a positive effect on economic growth in Brazil and Canada,which implies that natural resources contribute positively to economic growth and therefore is a blessing in these countries.The Wald test results reveal a long-run asymmetric effect between total natural resource rent and economic growth in Australia,Canada,the DRC,India,and Saudi Arabia and a short-run asymmetric effect in India and Saudi Arabia.The results also indicate a positive shock to trade openness has a positive impact on economic growth in most of the countries.The causality analysis in the nonlinear framework suggests that natural resource rent does not cause economic growth in the majority of the countries assessed.In chapter four,the study investigated the relationship between natural resource rent and government debt in a panel of 17 resource-abundant countries from 1991 to 2017.The researcher applied both Pooled Mean Group and Mean Group/ARDL estimations with panel unit root and cointegration tests.After establishing cointegration,natural mineral resource rents and economic growth are found to have positive effects on public debt in the long-run but a negative impact in the short-run.The Vector Error Correction Model(VECM)result shows a causal relationship exists between resource abundance and government debt.Finally,bidirectional causal relationships are found to exist between natural resource rents and public debt accumulation.Having determined the correlation between natural resource abundance and public debt,the study proceeded in chapter five to ascertain the asymmetric cointegration and causal relationships between natural resource abundance and economic growth.The model was extended by incorporating public debt to identify the role of public debt in explaining the resource abundance and economic growth relationship in the top 8 resource-abundant Sub-Saharan African countries from the period 1981 – 2017.The NARDL Bounds Testing approach and asymmetric Granger Causality tests are employed.Meanwhile,the author uses the pooled mean group(PMG)estimator for the eight countries pooled as a panel set.The empirical results of the study have established key relationships that have important policy implications.The results confirm nonlinear cointegration between the variables in Botswana,Congo Republic,Gabon,Equatorial Guinea,Nigeria,and South Africa.Long-run asymmetric effect results show that a positive shock to natural resource rents significantly increases economic growth in Equatorial Guinea;therefore,rejecting the resource curse hypothesis.However,an increase in natural resource rents in the Congo republic negatively affects economic growth,which validates the resource curse hypothesis.No significant effect is found in other countries studied.In terms of asymmetric causality results,no bidirectional causality between natural resource rents and economic growth is noted.However,results show a weak unidirectional asymmetric causality relationship running from economic growth to resource rents in the Congo Republic and natural resource rents to South Africa’s economic growth.In chapter six,the study progressed to analyze the asymmetric relationship between 26-year public debt and long-run growth in 17 resource-abundant countries over the period.On the one hand,a significant linear Granger causality relationship is found for nine countries.A unidirectional Granger causality running from public debt to economic growth was found in Congo,Zambia,Australia,and Saudi Arabia.In South Africa,Brazil,India,and the USA,economic growth Granger causes public debt.A bidirectional causality between the variables is identified.Cointegration results confirm that natural resource rent,public debt,inflation,trade openness,and population growth,and economic growth are nonlinearly cointegrated in 9 countries out of the 17 natural resource-abundant countries used for the analysis.Asymmetric cointegration was found in Botswana,Canada,Congo Republic,Equatorial Guinea,Gabon,Nigeria,Saudi Arabia,South Africa,and Sudan.In terms of asymmetric relationships,a reduction in public debt leads to an increase in economic growth in Congo Republic,Equatorial Guinea,Saudi Arabia,and South Africa.An increase in public debt stock negatively affects the economic development of the Congo Republic and South Africa.However,an increase in the public debt of Nigeria contributes to economic growth in the long-run.Finally,in terms of an asymmetric causal relationship,the study revealed a unidirectional causality running from public debt to economic growth in Botswana,Congo Republic,The DRC,Sudan,and Saudi Arabia.A nonlinear causality link from economic growth to public debt is identified in Australia.The study provided policy implications and recommendations that will assist policymakers in resource management decisions and fiscal policy planning.The present study provides views on significant nonlinear and asymmetric relations between total natural resource rents and economic growth,which will assist governments and policymakers,particularly in the application of the appropriate methodology in economic growth modeling.In terms of the findings revealed from the impact of total natural resource rents on economic growth in mineral resource-abundant countries,the study suggests the following:Mineral-rich countries with a developed economy,should not become complacent and therefore tend to underscore or overlook the essence of sound economic policies that will mitigate macroeconomic and financial volatility.Also,efforts must be made to sustain political stability in mineral resource-rich countries to avoid the resource curse.Also,pragmatic steps should be carried out to strengthen institutions and implement anti-corruption policies aimed at ensuring accountability and judicious use of cash inflows from minerals.Results also show that trade openness positively contributes to economic growth in some abundant resource countries;therefore,trade liberalization policies must be encouraged in those economies to promote the movement f factor endowments,especially capital and technology.Finally,the financial system must,therefore,receive strengthening,and also revenues from natural resources should be transferred to the real sector through the financial system,including diversification of the economy.Concerted efforts targeted at curbing corruption,improve transparency in management approach,and natural resource revenues moved to productive investments that can stabilize and stimulate economic growth.Concerning the negative effects of public debt on economic growth,mineral resource-rich countries must invest borrowed funds wisely to generate sufficient returns to pay off the debt and its accumulated interest.It will help avoid or minimize the incidence of debt overhang and crowding-out effects.Export promotion strategies could be embarked on to help raise enough foreign exchange to cover the government debt obligation.Implementation of sound economic management policies in terms of low inflation,trade openness,and the low budget deficit is critical for government debt effectiveness.Improve the quality of government institutions,encourage transparency and accountability to ensure efficient use of government loans.