The resource curse: Which institutions matter? * Ivar Kolstad

Abstract Two types of models are dominant in the current resource curse literature. One type of model studies the selection of entrepreneurs into rent-seeking versus productive activities. The other type analyzes the use of patronage by politicians seeking re-election. The policy implications of the two models are quite different. The first model suggests that institutions governing the private sector ought to be improved. The second that institutions governing the public sector should be emphasized. This paper empirically tests the impact of the private versus public sector institutions on the resource curse, using cross-country data from Sachs and Warner (1997a) and Polity IV. The main result is that only improved private sector institutions ameliorate the resource curse

Guided through the "Red tape"? : information sharing and foreign direct investment

What drives the observed tendency of new FDI, other things equal, to be attracted to locations where many other foreign investors are located? One explanation in the literature on FDI location is that expected bene ts from agglomeration externalities make rms want to locate in agglomerated regions. Alternatively, potential investors get information about conditions in a host from rms in their own business network that already have experience from that country. We study how Norwegian FDI location choice depends on previous Norwegian presence, using information about institutional quality to separate the impact of information sharing from agglomeration externalities. The impact of previous Norwegian investors is larger in countries with low institutional quality. We interpret this as consistent with the presence of information sharing among Norwegian investors

Foreign direct investment during transition. Determinants and patterns in Central and Eastern Europe and the former Soviet Union

This paper provides an analysis of foreign direct investments to the countries of the former Soviet Union and 10 of the former socialist economies in Central and Eastern Europe (CEE). Foreign direct investments to the region is highly concentrated, Poland receiving close to 25 percent of the inflow on average from 1994-1998. There also appears to be a rather striking relationship of close psychic distance between host and source countries. Germany in particular, but also other Western European countries are the most important source countries for FDI in CEE. The Scandinavian countries are important in relative terms in the Baltic (B) countries. So is Asia in the Central Asian and Turkey in the Turkish speaking countries of the Commonwealth of Independent States (CIS). A regression analysis of data from 1994-1998 is performed to identify determinants of FDI. The results indicate a difference in motive for investing in CIS and in CEE and B. Whereas size of the market is a significant determinant in CIS, only progress in transition seems to influence the inflow of FDI in CEE and B. Natural resources were not included in the empirical analysis due to lack of data. However, the experience of countries such as Azerbaijan and Kazakhstan clearly indicate an important role for resource seeking activities in the area. The findings thus support a hypothesis of market seeking and resource-seeking investments prevail in CIS. Investments in CEE and B on the other hand appear more risk sensitive suggesting a role for the efficiency-seeking or vertical investments. Thus, as an economy progresses in transition and knowledge on the country is accumulated and available, market insecurity is reduced changing the nature of investment and increasing the level of investment

Social Development and Foreign Direct Investments in Developing Countries

This study analyses the link between social development and foreign direct investment (FDI) in developing countries. Previous empirical studies conflict in their view of the impact of wage levels and human capital on FDI, whereas some aspects of political stability appear to attract investment, and corruption deters FDI. In this study, we use panel data from 61 developing countries for the period 1989- 2000, and estimate the relationship between disaggregate socio-political indices and FDI. The most robust variables influencing FDI prove to be political rights, civil liberties, democratic accountability, religious and ethnic tensions and internal conflict. Interpreting the results, the social development variables that matter for FDI flows seem to be those most closely associated with investors’ perception of long term stability, whereas other social development variables have limited impact on overall FDI

Will International Trade Reduce Poverty? A Background Note to Norad

NORAD is currently developing a trade strategy towards developing countries. This background note presents a review of the current literature and empirical findings on the relationship between trade, growth and poverty reduction. There is also a review of the Aid for Trade debate. Opening up an economy to international trade increases the income of that country. Whether trade liberalisation increases long-term economic growth and more open countries achieve higher growth than other countries is more disputed in the literature. The overall results seem to suggest that developing countries as a group will benefit from liberalisation but that those benefits will be uneven. Some countries will lose out. If poverty reduction is the main goal, trade policy cannot be a main vehicle for improving the situation of the poor. Specific requirements for success in making trade and growth a tool for poverty reduction must be tailored to each country. Just as there are no blueprints for development, there are no blueprints for trade promotion and export-based growth. Finally, market access is a core precondition for increasing exports from developing countries. Hence, Aid for Trade and many of the other efforts proposed will not be beneficial to poor countries if rich countries continue to apply trade restrictions (as Norway does on agriculture)