The effect of natural resource rents on institutional quality in selected African countries

The effect of natural resource rent on institutional quality remains debatable and thus needs further investigations. Using the World Bank's world development indicator and world governance indicator data for a panel of 43 selected African countries over the 1996-2022 period, this study investigated the effect of natural resource rents on institutional quality. To estimate the data, we used the Cross-Sectional Augmented Autoregressive Distributed Lags (CS-ARD) model, the Dynamic Common Correlation Effects Mean Group (DCCE-MG) estimator for robustness check, the panel causality test, and the Dynamic Panel Threshold (DPT) estimation techniques. The CS-ARDL and DCCE-MG findings revealed that natural resource rents have an adverse and significant effect on institutional quality. The DPT estimation indicated that natural resource rents have a threshold parameter of 2.241%. Positive effects of natural resource rents on institutional quality are observed when it is less than or equals to this threshold parameter; negative and significant effects were reported when natural resource rent is greater than the threshold parameter. The panel causality test result showed a bidirectional causal relationship between variables except the unidirectional causal relationship between trade openness and institutional quality. Thus, establishing strong intuitions, strengthening natural resource governance and management, improving accountability, promoting and upholding the rule of law, and involving the communities, particularly in decision-making processes related to the management, allocation, and distribution of natural resources, helps to reduce the adverse effects of natural resource rents on institutional quality.