Resources and Incentives to Reform

This paper models the incentives for a self-interested government to implement "good policies." While good policies lead to investment and growth, they also reduce the government's ability to reward its supporters. The model predicts that resource abundance leads to poor policies and, consequently, to low investment. The implications of the model are broadly supported by existing evidence. In particular, countries that are rich in natural resources tend to have low institutional quality and poor macroeconomic and trade policies. Copyright 2003, International Monetary Fund