Why Do Some Natural Resource-Rich Countries Adopt Prudent Fiscal Rules? An Empirical Analysis

What is the relationship between natural resource wealth and the adoption of fiscal rules that may help resource-rich states mitigate the effects of a so-called resource curse? We argue that the adoption of fiscal rules by resource-rich countries is conditional on a number of previously unconnected factors, including whether states receive large amounts of rent from natural resources, have high levels of domestic institutional quality, or face external pressure to adopt such rules. Using panel data on 166 countries during the 1985–2015 period and accounting for current levels of democracy and the quality of domestic institutions, we find that countries deriving rents from natural resources are less likely to adopt prudent fiscal rules in general. However, the negative effect of natural resource wealth on the likelihood of states adopting fiscal rules is largely concentrated in countries with low institutional quality. Furthermore, we find that external pressure in the form of fiscal conditionality from the IMF increases the likelihood of states implementing fiscal rules, suggesting that there are ways that states can mitigate the ‘resource curse.’ These findings are robust to alternative data, model specifications, and estimation strategies, including the instrumental variable approach.