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Political economy of natural resources

2.1. Introduction

The second chapter reviews the literature on political economy of natural resources, particularly concentrating on the 'the resource curse' dilemma- suggesting that resource abundant countries tend to develop slower than the resource-poor ones. In order to discuss natural resource paradox, it is necessary differentiate the natural resource wealth from other types of wealth and understand what make it important. According to Humphreys, Sachs and Stiglitz (2007), there are two key differences between them. The first is natural resource wealth doesn't need to be produced but extracted unlike other sources. Secondly and crucially, many natural resources such as oil, gas and mining resources are nonrenewable. For number studies of Leite and Weidmann (1999) and Sala-i-Martin and Subramann (2003) differences are referred as point resource like mineral and petroleum rather than diffuse resource such as land.

Having an abundant natural resource has not been considered as a 'curse' all the time. Prior to 1980s, the conventional view, concerning natural resources was considered as an advantage and contribution to economic growth and development. In the 1950s, for example, political geographer Notron Ginsburg said that: 'The possession of a sizable and diversified natural resource endowment is major advantage to any country embarking upon a period of rapid economic growth' (as cited in Rosser, 2006). Many of the mainstream economists shared the same views with above statement. Moreover, during 1960s and 1970s, the advantages of natural resource received a deeper meaning and applaud and many of the scholars have argued that with abundant natural resources can make developing economies lead to industrialization by providing funds and markets.

Literature, challenging conventional view, has started to emerge in late 1980s, even though origin was quite early - brining up structurialist theories of 1950s such as dependency theory (e.g., Prebish, 1950). Early studies of the thesis was connected to 'Dutch Disease' - referring to economic condition that raises negative consequences from large increase of country's income such as new natural resource discovery, resulting in boosting foreign currency, foreign investment and aid - developed by Corden and Neary (1982). However, the stepping stone towards more accurate term and emphasize on resource thesis was presented by Auty (1993) - describing how natural resource-rich countries were failed to use their wealth for economic prosperity and had lower economic growth compared to countries without natural resources. Following literatures of Ross (1999), Hausmann and Rigobon (2002), Isham and et al. (2004), Deacon and Mueller (2004) and Rosser (2006), all suggest that natural resource abundance increases the negative economic, political and social outcomes including poor economic performance, low levels of democracy, weak institutions, and civil war rather than being a 'blessing' for sustainable development.

Along with extensive study of the resource curse thesis, numbers of empirical studies have increased concerning natural resource abundance and economic growth, institutional performance, country's development and political regime etc. This paradoxical yet robust negative association between growth and resource dependence has been highlighted in numerous studies (Auty, 1990, 1993, Gelb et al., 1988). One of the first comprehensive empirical studies was done by Sachs and Warner (1995) on ninety-seven countries over the nineteen year period using econometric regression techniques to analyze the impact of resource exports on GDP growth and found that high ratio of natural resource exports to GDP tended to have low growth rates. Along with similar lines, authors like Gylfason (2001), Auty and Mikesell (1998) did empirical analysis concerning natural resource abundance and economic growth and performances.

Despite the strong evidence, there is a little consensus as to how the resource curse actually occurs. What explanations and theories have been advanced for these results? To provide structured understanding on theories and empirical aspects of the resource curse, the chapter will discuss political economy of the resource curse from two levels of analysis: the theoretical background and empirical studies. The first part of this chapter on theoretical background will investigate theoretical background of the resource curse and attempted and argued explanations of the resource curse occurrences and the second part will concentrate on empirical analyses regarding natural resource abundance and the resource curse. Both parts will be divided into three general separate sub-literatures: i) natural resource abundance and economic performance; ii) natural resource abundance and civil war; and iii) natural resource abundance and political regime. Within the sub-literatures, each will cover up most recent and popular literature of the resource curse aspects in relations with topic. The chapter will conclude that even with numerous evidences of the resource curse still remains a debatable. Moreover, as cases have been shown in resource-rich developing and developed economies, it can be avoidable with right economic and political policy cooperation and good institutional environment.

2.2. Political Economy of The resource curse

Since 1950s to 1970s, the question of natural wealth was in center of attention and debates between mainstream scholars. As stated by Ross (1999), even though the topic was in heat economist and political scientists were not aware of each others' contribution to the topic and political scientist were concentrating to their area of their specialties. Since 1950s, as economists were able to contribute with small number of studies explaining the resource curse with statistical tools; political scientist have lacked a well selected comparative cases with large data sets, even though they had number of explanations with case studies. Therefore, following two sub-sections will discuss the theoretical background of the resource curse and its empirical studies.

2.2.1. Theoretical Background

The literature on the resource curse has started to emerge in the 1980s and has expanded tandem with improved theoretical and empirical researches. Therefore, literatures regarding relationships of natural resource abundance and the resource curse can be divided into main three sub-literature parts which are: natural resource abundance and economic performance; natural resource abundance and civil war; and natural resource abundance and political regimes. The concept of natural resource was initially associated with the first sub-literature part as it has emerged before the other two sub-literatures (Ross, 1999). However, other two sections followed up and developed over the years. The relations of resource wealth and civil war was response to Collier and Hoeffler's article of 'On Economic Causes of Civil War' (1998) and the third sub-literature - relationship of natural resource abundance and political regime - was emerged from Wantchekon (1999) and Ross (2001). With variety of research explanations the resource curse has started to approach as a multi-dimensional phenomenon, not only just poor economic growth or performance but also civil war and armed conflicts, and political regimes and authoritarianism.

2.2.1.1. Natural resource abundance and economic performance

Numerous studies have presented evidence suggesting that natural resource abundance, or at least a particular natural resource, reduces economic growth and weakens the performances. One of the earliest works on economic performance of natural resource-rich countries from economic discipline were Dutch Disease and the long-term decline in terms of trade of primary commodities, most commonly cited as the mechanism through which the curse manifests itself in an economy.

Arguments regarding penetration of primary commodities have its origin in structuralist school of economics and works of Prebish (1950) and Singer (1950) (Ahmed, 2007). Orthodox trade theory suggests that countries with rich-natural resource should exploit their comparative advantages and follow a strategy of primary-export led growth. However, Prebish and Singer has challenged the theory and argued that developing countries' primary commodities suffer from declining terms of trade as their exported commodity price will decline faster than the export goods of industrialized countries, resulting them lower purchasing power with low competitiveness and remain poor. On the other hand, scholars such as Nurske (1958) argued that instability of international commodity market affects the domestic markets of natural resource abundant countries, resulting consistency of government revenues and foreign exchange supplies. Moreover, Hirschman (1958) connected economic growth of resource-rich countries with activities and reinvestment of the multinational enterprises, stating that their profit repatriates rather than reinvesting the domestic economy.

And, in the early 1980s, several studies brought up arguments concerning vulnerability of resource abundant economies to Dutch Disease and it might deter economic diversification and increase in resource dependence. As Pegg (2005) explained, Dutch Disease literature find resource boom at fault for stagnation of economies with two reasons. The first one is with resource boom, real exchange rate tends grows resulting in increase of export and revenue income. Secondly, following export increase factors, particularly labour and capital, production tends to drawn out of the competing tradable sectors such as agriculture and manufacturing into resource and non-tradable sectors like retail, services and construction. These two reasons can direct the economy in production and output decline of agricultural and manufacturing sectors and domestic inflation, resulting price increase of non-tradable goods. All in all, the resource boom consequences are appreciation of exchange rates, rising in costs of other sectors, uncompetitive manufacturing and agricultural sectors and poor economic performance.

Moreover, other adverse effects of Dutch Disease with its connection to resource abundant economies have been stated by Weinthal and Luong (2006), saying that it can result in and encourage rural and urban migration by increasing income inequality and decrease of skilled labour demand. In similar line, Gylfason (2001) also argued that these affects can extend to human capital because resource dependence has the capability of reducing incentives to invest in education as demand for skilled labour had decreased. But, even with there are all these challenges and effect studies also suggest that governments can take actions to address the problems by operating political mechanisms rather than economics (Ross, 1999). That's why most of the recent studies of economic performance and natural resource have been concentrating on role of political variables. Economists have increasingly incorporated with ideas from political side of the resource curse, particularly, ideas from neoclassical political economy and new institutionalism (Rodik, 2003; Isham et al., 2005; Auty, 2001a, 2001b Torvik, 2002). At the same time, political researches have brought new debates which concentrates on political factors that shape economic outcomes onto the resource curse literatures such as behaviouralism, public choice theory, Marxism, institutionalism, dependency and world system theory (Anderson, 1988; Caselli and Cunningham, 2009; Ascher, 1999). As a result, it can be suggested that both political and economic scientists agreed that immediate cause of poor economic performance in resource abundant countries has been a poor economic management, especially overvalued exchange rates, excessive protection, fiscal dissolution, and inefficient use of resource windfalls.

Literature on economic performance and the resource curse can be followed up with Rosser's (2006) literature review which was grouped into 5 perspectives: i) behavouralist perspectives that emphasize on behaviors of political actors like emotional or irrational behaviors); ii) rational actor perspectives that emphasize on self-interested behavior on political actors' part; iii) state-centered perspectives that emphasize on the nature of the state; and, iv) structuralist perspective that emphasizes the role of social groups or socio-economic structure; v) social capital perspectives that emphasize the degree of social structure in countries.

- Behavouralist and Rational Actor Perspectives: Behaviouralist perspectives have suggested that having a rich-natural resource can lead to various types of emotional and irrational behaviours, such as shortsightedness, sloth or over-exuberance, from political elites' part, resulting in or contributing to poor economic policy making and institutional deterioration. On the other hand, unlike behaviouralist perspectives, rational actor perspectives show political actors as rational utility-maximizing individuals. It says that irrational behaviours of political elites are not the problem with natural resource abundance but, it provides them with opportunities to own benefits through 'rent-seeking' - a behaviour developed from an assumption that resource rents most likely lead to bribes, distortion in public policies, and diversion of labour away from productive activities toward seeking public favour - and become the main problem in this respect.

Arguments regarding behaviouralist perspectives featured in the earliest works of great political economy researchers like Wallich (1960), Levin (1960), and Watckins (1963) and recent literature found in Mitra (1994), Krause (1995), and Caselli and Cunningham (2009) (Ross, 1999; Rosser, 2006). As Mitra (1994) argued that resource boom creates tendency to optimism for future benefits, in turn leading to excessive government spending, Krause (1995) supported the argument with suggestion that natural resource abundance leads to wishful thinking among the policy makers of resource-rich countries. On the other hand, arguments supporting rational actor perspectives were suggested by both Ascher (1999) and Ross (2001a) that implied countries with rich-resource mostly waste them due to the politicians' misusage of revenue with political objectives such as financing particular groups, supporting controversial programs, creating rent-seeking opportunities and gaining control over its allocation, and evading accountability. Furthermore, Robinson, Torvik and Vendier (2006) said not only elites tends to over-extract natural resources relative to the efficient extraction path but also resource booms can increase the misallocation in the rest of the economy through elites' influence to future election outcomes by staying in power and increase in resources. However, other scholars such as Torvik (2002) have implied that social actors are to be blamed more rather than the political ones for the rent-seeking. He stated that natural resource abundance can increases the profit from rent-seeking of social actors and their engagement in the sector, in return encouraging their actions and reducing the activities in productive sector. More recently, Caselli and Cunningham (2009) expanded the literature by arguing that it is also crucial to understand how resource abundance affects the leader's 'survival function' or retaining power probability form. They stated that as elites becoming direct recipient of resource revenue with increase of revenue their choices of own enrichment, power struggle to stay in power and retain in position, and increasing productivity of non-resource sectors broadens which effects the political economy of natural resources and economic performance of country.

State-centered, structuralist and social capital perspectives:

These perspectives imply that unlike influences of politicians, elites and social actors' behavior, natural resource abundance leads to poor economic performance because of the institutional capacity of the state (Auty, 2001a, 2001b; Auty and Gelb, 2001; Moore, 2004), relative power of different social groups (Mahon, 1993; Auty, 1995) and a weak social structure to deal with the economic challenges (Isham et al., 2005). Concerning the state-centered perspectives that underline the state nature, Moore (2004) has pointed out that natural resource abundance leads developing countries to bad governance due to the weak accountability to the society. Similarly, Auty and Gelb (2001) have argued that natural resource abundance can increase the possibility of countries developing predatory or factional oligarchic states rather than developmental ones with reasons such as having a protective trade policies due to effect of Dutch Disease, supporting inefficient inward industrial sectors with resource sectoral transfer and leaving out low-matured growing sectors or being more prone to cumulative policy error. In regard of structuralist perspectives, it is suggested that relations of resource-richness and weak economic performance, is having a relative power of different social groups that might increase the pressure on government for their benefits rather than common economic interest. On the other hand, social capital perspectives point out that having natural resource-richness undermines social structure and limits the government management capacity.

2.2.1.2. Natural resource abundance and civil war and conflict

The literature about relationship between natural resource abundance and civil war has started to grow since mid 1990s and, they have found that natural resource, especially oil and gemstones, play a key role in triggering and prolonging there civil wars and conflicts. As suggested by Rosser (2007) it is important to connect the motives and economic incentives and opportunities for of the rebels and their organization. The first argument reflects the behaviouralist ideas and suggests that civil wars are caused due to the limited political rights, inequalities of wealth, or/and ethnic and religious division. The grievances arguments, mainly implied in works of political scientist, assumed that rebellions are caused by greed of rebel leaders and their followers, in given opportunities for their funding of their activities (Ross, 2003; Regan, 2003). Here, natural resource abundance is important, particularly when grievances is related with various types of natural resource exploitation like environmental degradation, labour migration and inadequate job opportunities, as it worsens the grievances that lead to rebellion.

On the other hand, the second argument more reflects the rational choice perspectives and emphasizes the economic incentives and opportunities facing rebel groups, extended more in economists' studies such as Collier and Hoefflier (2004). On that account, natural resource abundance is important because it constitutes a potential source of funding for rebel activities, especially as Collier and Hoefflier (2004) emphasized it constitutes potential source of funding to start costs of rebellion such as buying arms and hiring soldiers. Literatures explain the extraction of primary commodities and selling resources directly in order to raise money for rebellion activities as 'looting' mechanism (Ross, 2004). Another set of literatures argue that neither grievances nor looting arguments are helpful to fully understand civil war in particular cases. For instance, Ballantine (2003) said that 'Economic incentives and opportunities have not been the only or even the primary causes of these armed conflicts, rather, to varying degree, they interacted with socio-economic and political grievances, inter-ethnic disputes, and security dilemma in triggering the outbreak of warfare', after studying several civil wars in developing countries of which several had abundant natural resources.

Scholars who are viewing from state-centered perspectives argue that the civil wars and armed conflicts occur in resource abundant countries due to the state weakness rather than greed or grievances of rebellion leaders. According to Auty (2004) and Rosser (2007) arguments, natural resource create conditions for civil war when natural resource precedes to emergence of predatory states, leading to weak economic performances and collapse of growth, and also poor economic governance and exclusiveness on the part of the state.

Another set of arguments referring to natural resource abundance and civil war was offered from dependency perspective scholars. As stated before, dependency theorists have argued that natural resource abundance turns developing countries into targets of rich countries that wish cheap access to resources to gain for their development and wealth, forcing the resource-rich developing economies into the global capitalist system. In other words, their view of armed conflicts in resource-rich countries is related with contest over scarce natural recourses between them and rich states. This argument can be labeled same as Ross's 'foreign intervention' mechanism.

2.2.1.3. Natural resource abundance and political regime

Most of the debate and literature over the links between natural resource abundance and political regime type have centered on the following four arguments. The first argument reflects a state-centered perspective with notion of rentier state which states that natural resource abundance hinders democracy because governments of resource-rich states can use government spending and lower the taxes to reduce the pressure for democratization. In authoritarian regime, it implies more limited scope for democratic changes as argued by Lam and Wantcheckon (2003), economic benefits of resource boom is mainly concentrates around political elites, in turn giving them possibility to maintain support and join their power. Moreover, Ross (2001) stated the same argument relating to oil-rich states.

The second argument, which is in the same view with state-centered perspective, suggests that natural resource abundance hinders democracy by enabling governments of resource-rich states to spend more on internal security with purpose of limiting the scope of political opponents by organizing challenges. This arguments were discussed in Ross (2001) and Rosser (2007) literatures with empirical studies mostly related with African resource-rich countries. The third argument, based on the rational actor perspective, analyzes the causes of civil war and focuses on the link between civil wars and political regimes. As explained by Jenson and Wantchekon (2004), natural resource abundance can serve to consolidate particular regime in power, in turn making it rational for other opposition group oppose against them through demonstration, war or/and armed conflict in order to gain power. However, depending on the outcome of the war or conflict it can lead to dictatorship. The fourth argument is in line with structuralist perspective and suggests that natural resource abundance obstructs democracy by preventing the social and cultural changes that facilitate democratization such as rising education levels and occupational specialization (Ross, 2001; Rosser, 2007). The political-economic explanation, with quantitative studies of Ross (2001) and Jensen and Wantchekon (2004), has implied that democratic regimes would respond better to general public interest and redistribute more broadly the benefits of investment in natural resource sector.

2.2.2. Empirical Studies

Along with extensive study of the resource curse thesis, numbers of empirical studies have increased concerning natural resource abundance and economic growth, institutional performance, country's development and political regime etc. Since the 1950s economics have continued to study a small number of prominent explanations for the resource curse, with better data and increasingly sophisticated statistical tools. On the other hand, political scientists had almost the same number of case studies for resource cruse explanations, yet without tested on well-selected comparative cases or large N-data set. The lack of theory testing can be explained with the obstacles faced by political scientists of developing countries where data is missing, poor, or prohibited to obtain. This paradoxical yet robust negative association between growth and resource dependence has been highlighted in numerous studies.

Empirical studies regarding natural resource abundance and the resource curse thesis mainly concentrate on resource-rich developing countries and supported by some basic facts (Gylfason, 2001) and cross-country empirical literatures such as Sachs and Warner (1995, 1997, 1999), Pritchett, Woolcock, Busby and Isham (2004), and Mehlum, Moene and Torvik (2006). In addition, a number of studies have connected the natural resource abundance to poor development of resource dependent economies (Gelb, 1988 and Ross, 1999, 2001). The empirical literature on the resource curse frequently emphasizes that resource dependent economies and resource booms lead to following impacts. Goodman and Worth (2008) has divided the impacts into three different aspects: the first is socio-economic impacts which rose from the changing terms of trade, income instability, weakened non-resource sectors, dominance of foreign-owned resource companies, separation of locally affected population and resource elites; second is political aspects stemming from availability from resource rents, especially in terms of corruption, patronage and highly dysfunctional state behavior (Auty, 2001); and, the third emphasizes the ecological impacts from living environment to site of extraction or communities' life cycle. However, in this section we will more close look up the first two aspects as they're more relevant to the purpose of the paper.

2.2.2.1. Natural resource abundance and economic performance

A numerous studies were done in line with natural resource abundance and economic performances, growth and development. One of the first comprehensive empirical studies was done by Sachs and Warner (1995) on ninety-seven diverse set of resource-rich countries between 1970 and 1989, using econometric regression techniques to analyze the impact of resource exports on GDP growth. They found that negative correlation between high natural resource export and GDP growth after controlling for a variety of variables, such as initial GDP per capita, trade policy, investment, terms of trade volatility and income distribution and concluded that high ratio of natural resource exports to GDP tended to low growth rate. Gylfason and colleagues (1999) and Liete and Wiedmann (1999) reached to the similar results after their studies with large database. Moreover, Auty (2001) found that the per capita incomes of resource-poor countries grew at rates two to three times higher than resource-rich countries between 1960 and 1990.

Similarly with theoretical background empirical literature of natural resource abundance and economic performances can be grouped into following four explanations: i) Dutch disease; ii) resource rents and rent-seeking; and iii) resource abundance undermines political institutions.

- i) Dutch Disease: Initially, researchers explained the resource curse, emphasizing possible macroeconomic transmission mechanism such as Dutch disease. Even though, relation between the Dutch disease and the resource curse is both arise from resource-riches, they take on different forms and cause of phenomenon. According to Larsen (2004), the Dutch disease is a term used for phenomenon that resource exports leads to a rapid reduction of the non-resource traded goods sector. In contrast, the resource curse can be understood as the phenomenon that resource abundant countries tend to grow slower - with measurement of aggregate output per capita - than non-resource rich countries do. A numerous literatures and empirical studies of the Dutch disease is mostly a collection of countries and comparative studies for OECD and developing countries. However, late literatures started to cover and include not only above mentioned economies as well as least developed countries, as studies by Spatafora and Warner (1999) in 18 oil-exporting countries between mid 1960s till 1980s. The cases of the Dutch disease have been recorded over the years in agricultural sector of Dutch, Australian gold boom in 19th century, and Columbian coffee in 1970s. As implied by many scientists, Dutch disease spells trouble down the road- when activities in natural resource sector eventually slow down, other sectors may find it hard to recover.

- ii) Resource rents and rent-seeking: It has developed, becoming one of the political explanations of the resource curse, from one hand due to the assumption that resource rents are easily appropriable which in turn leads to rent-seeking, bribes, corruption, and distortion in public policies. Sachs and Warner (1995) and Harkness (2008) stressed that resource rent can inspire corruption and rent-seeking behavior where competing groups struggle for control over natural resources and produce inefficiencies in both the political and economic systems through taxation and patronage. Moreover, some literatures also suggest that rent-seeking may distract government officials from investing long-term growth enhancing public goods such as education (Leite and Weldmann, 1999). Torvik (2002) studied the relations between natural resource abundance and low welfare through rent-seeking mechanism, concluding that with increasing number of entrepreneurs in rent-seeking leads to reduction of number of entrepreneurs in productive sectors. Moreover, Wick and Bulte (2005) studied natural resource abundance with conflicts through rent-seeking and concluded that rich natural resource encourages re-allocation of effort form production towards rent seeking and conflict.

Case studies of Khan and Sundaram (2000) included rent-seeking experiences of Asian countries such as Philippines, Thailand, Malaysia and Indonesia, at the same time covering economic and political background of the concept. The latest empirical literature of rent-seeking was analyzed by Wing Ngo and Wu (2009) in case of China as transition country. Both literatures have implies as concluding mark that resource rent and rent-seeking is evident in both developing and developed countries. Hence, the Hence, understanding of renter state would be one of the key perspectives from political view for analyzing case of Mongolia for later chapter.

- iii) Institutions: Empirical studies on institution and natural resource abundance were provided by various authors, including Ross (1999, 2001a), Leite and Weidmann (1999), Sala-i-Martin and Subramanian (2003), Isham et al (2005), Mehlum et al (2006), Sokoloff and Engerman (2000), Jensen and Wantchekon (2004), Robinson et al (2006), and Hodler (2006). In one hand, they can be divided into two analyses. The first analyses the growth or conflict effects of resources, conditional on the quality of institutions. The second emphasizes within the institutional quality and considers the impact of natural resources on the institutional frameworks (Wick and Bulte, 2009). Mehlum, Moene, and Torvik (2006, 2006a) stated that the main difference between success and failure cases of resource-rich economies is quality of their institutions and explained their economic performances with institutional and political indicators. Moreover, using case studies from Southeast Asia, Ross (2001a) analyzed the destructive effects of timber booms on the quality of the institutions that are supposed to manage timber harvesting. Karl (1997) examined that a large flow of 'petrodollars' might weaken the state and undermine the ability of government to manage the economy, resulting in poor economic performance.

On the other hand, the largest part of studies on institutional empirical approaches relies on the importance of creating an institutional environment that is generally supportive of market. As Pessoa (2008) showed, in the empirical literature in term of institutions encompass a wide range of indicators, including: institutional quality (the enforcement of property rights); distinctiveness in political regimes (constitutions, elections); political instability (riots, civil wars); social characteristics (differences in income and in ethnic, religious, and historical background); and social capital (the extent if civic activity and organization). With institutional context as given Mehlum et al (2006) made a successful attempt to analyze why the curse occurs in some countries and not in others. In their study, they made a model where some entrepreneurs have to divide themselves across two sectors: manufacturing sector and rent-seeking sector. In rent-seeking, entrepreneurs are unproductive and live off resource rent. However, in manufacturing sector, it is productive and even subject to increasing return to scale at the sector level. Additional papers took rent-seeking for explanation and argued that rents are easily accessible by elites and politicians, leading to bribery and corruption (Karl 1997, Torvik, 2002). Whereas rent-seeking models institutions stress governing the private sector, patronage model stress institutions governing the public sector.

As Kolstad (2008) has tested both hypothesis and concluded that private sector institutions matter more empirically. Stevens and Dietsche (2008) have implied almost the same line, analyzing that role of the institutions are important both in countries where it is good and weak. For those which have good institutions politicians are less influential to election outcomes and use patronage, and for those institutions are weak, preserve political incentives might dominate which will have negative impact on income. Therefore, author suggested that countries should improve the qualities of their institutions to undermine the negative political-economic impact that natural resource exploitation will otherwise have. For developing economies with natural resources such as Mongolia strengthening its institutional qualities and creating right institutional environment is crucial for beating the resource curse.

2.2.2.2. Natural Resource Abundance and Civil War

Some analyses of civil conflict find that natural resource abundance leads to greed-motivated rebellion, as others argued that it is the scarcity of natural resources that flickers civil war. Collier (2007) found string empirical support for the proposition that natural resources motivate rebellious behavior, leading to civil war and conflict from macroeconomic perspective. In other words, it can be stated that natural resource availability spawns violent conflict because it provides incentives for rebel groups to form on basis of capturing loot at the same time sustaining their activities. Moreover, violence and rebellion also can be generated from by the weakening of institutional structure that usually safeguard collecting taxes, providing other public goods, ensuring growth of other sectors than natural resources, and property rights. Within the context of literature many have raised issues of type, duration and intensity of civil wars and conflict within the resource-rich economies.

- Type of civil war: Sub-literature on natural resource abundance and civil war contains analysis and empirical evidences of the link between different types of natural resources and different types of conflict. According to Le Billion (2001) there are 4 different types of natural resources, each is associated with different types of violent conflict. According to the author, there are 2 dynamics with each of the resources. First, due to the its concentration in particular locations point source resources can be obtained easily by single group, however, diffuse source resources are harder for any single group to capture because they are spread out over a broad geographical area. Secondly, natural resources, close to the capital can be easily controlled by the government, resources that are distant from capital easier for rebels to capture. As a result, he concludes that point source resources that are close to the capital tend to be associated with conflicts over state control; point source resources that are distant from capital tend to be associated with separatist conflict; diffuse resource that are close to the capital will tend to be associated with rebellious and rioting; and diffuse resources that are distant from the capital will tend to be associated with warlordism (Rosser, 2006).

On the other hand, Ross (2003) has presented empirical studies base on a series of case studies from Sub-Saharan Africa, suggesting the incidence of particular type of civil war largely depends on the 'lootablenss' of natural resource. He stated that whereas unlootable resources are more likely to produce separatist conflicts because it demands skilled labour and capital for extraction which leads to workers from outside, workers and involvement of firms and government, lootable resources are more likely to produce nonseratist conflicts because it does not require skilled labour where locals can benefit.

- Duration and intensity: Sub-literatures of duration of civil wars suggests that there are four ways to prolong the conflict: i) by enabling weaker side in resource conflict to raise funding through looting and in so doing sustain itself over itself over time (Ross, 2004; Ballantine, 2003); ii) by giving combatants incentive to avoid a peace deal (Ballentine, 2004; Sherman 2000); iii) by reducing the likelihood that governments will initiate a peace deal that gives fiscal autonomy, in case of separatist conflict (Ross, 2004); and iv) by enabling the weaker side in a conflict to raise money by selling future exploitation rights to minerals that they want to control (Ross, 2004) (Rosser, 2006). However, there is a still a debate over which one is more valid as Ross's (2004) study incentives for peace deal appeared to lengthen two conflicts, while at the same shorten three other conflicts and have no effects in a number of conflicts.

In relations with intensity of civil war, Ross (2004), suggested that natural resource abundance may increase the causality rate during civil war by: 'encouraging combatants to fight for resource-rich territory which otherwise might have little value'; and 'giving the government an incentive to react to small challenges with usually harsher countermeasures'. On the other hand, other researchers have stated that in cases of Sierra Leone and Democratic Republic of Congo cases, encouraging combatants to cooperate in resource exploitation can reduce the intensity of conflict (Ballentine, 2003). All in all, mechanisms affecting intensity and duration of civil wars focus more on the economic incentives facing combatants which are more consistent with view of greed rather than grievances (Rosser, 2006).

2.2.2.3. Natural Resource Abundance and Political Regime

May case studies have demonstrated that when country's income rises, government tends to become more democratic. However, it is not usually the case where income increase is traced back to natural resource wealth, especially when it is oil. From 1970 and 1995, countries with higher level of natural resource dependence tended to be more authoritarian than their less resource dependent countries (Ross, 2001). Hence, many studies have implied that higher levels of natural resources are associated with higher levels of government consumption and worse government performance. Jensen and Wantchekon (2004) argued that natural resources are not only important determinants of democratic transition but also partially determines the success of democracy and took cases of African economies. In their empirical analyses they suggested that natural resource dependant countries tent to be authoritarian and exhibited higher level of government spending. Most of the empirical cases concentrate on African and Sub Saharan oil-rich countries, however, Ross (2001) findings included other nonfuel mineral rich economies in Africa and Asia; where progress towards democracy has been haltering in Angola, Chile, the Democratic Republic of Congo and Peru. Wanthekon (1999) examined crucial determinants of African and Asian political regimes in their level of dependence of natural resource revenue and took a case study of Norway for further implication. In addition, Smith (2004) conducted a test the effects of oil in regime failure, political protests and civil war and found that oil wealth is strongly associates with increased regime durability and lower livelihoods of civil war and anti-state protests.

2.3. Conclusion

The chapter has covered both theoretical and empirical studies of natural resource and the resource curse thesis and examined their links in connection with three main sub-literatures: economic performance, civil war, and political regime. It was widely believed that natural resource wealth was an additional opportunity for developing countries which owned it and step ahead to economic growth and development. However, with overwhelming number of unsuccessful achievements of those natural resource abundant economies, the 'blessing' turned into question of 'curse' which is now viewed as the resource curse thesis.

Since the late 1980s, with broad literature covering natural resource abundance both theoretically and empirically, the idea of natural resource was indeed bad for development is now widely accepted by economic and political researchers and officials at major international financial institutions such as World Bank and International Monetary Fund, as well as by NGOs like Save the Children and Oxfam. However, alongside with numerous cases of failed resource-rich states a few succeeded to overcome the resource curse and demonstrated that it is not inevitable. These include developing countries like Botswana, Chile, Malaysia, Indonesia and the developed economies Canada, Australia and Alaska.