The effect of natural resources on sustainable development: The institutional threshold

Abstract

This study investigates the contentious and non-linear relationship between institutional quality and sustainable development, with a specific focus on how robust institutions moderate the often-paradoxical impact of natural resource wealth. The analysis employs a dynamic panel threshold regression model, estimated using the Generalized Method of Moments (GMM) technique, on a dataset of 70 countries spanning the period 1980 to 2020. This methodological approach is chosen to robustly account for endogeneity and to precisely identify critical breakpoints in the institutional-development nexus. The empirical findings unequivocally confirm a statistically significant threshold effect. The results demonstrate that high-quality institutions are not merely beneficial but a critical precondition for translating natural resource endowments into positive sustainable development outcomes. A precise threshold of 8.43 on the underlying institutional quality index is identified. Below this critical level, the resource curse phenomenon prevails, where natural resources have a muted or even negative effect on development, likely due to rent-seeking and governance failures. However, once a country surpasses this institutional benchmark, the relationship reverses; natural resources then exert a strong, significant, and positive impact on sustainable development. The central policy implication is unambiguous: the developmental benefits of natural resources are not automatic. They are entirely contingent upon a country first achieving a minimum level of institutional robustness. Consequently, for resource-rich nations struggling with development, the paramount priority must shift from mere resource extraction to deep-seated institutional reforms. Strengthening governance, curbing corruption, and enforcing the rule of law are not secondary objectives but fundamental prerequisites for harnessing resource wealth for lasting, sustainable development.