Re‐Examining the Mediating Role of Institutional Quality in the Relationship Between Poverty and Natural Resources: A Finite Mixture Model Application

ABSTRACT This study contributes to the understanding of how institutional quality influences the relationship between natural resources and poverty. The study uses data from 80 countries over a period ranging from 1996 to 2020, enabling a robust temporal and cross‐sectional analysis. We use four methods, namely (i) the Generalized Method of Moments utilized to address endogeneity issues, ensuring that the estimates are robust and reliable; (ii) Feasible Generalized Least Squares employed to test for heteroscedasticity, improving the efficiency of the estimators; (iii) Finite Mixture Model addresses heterogeneity among countries, recognizing that different groups may respond differently to natural resource wealth based on institutional contexts; and (iv) Panel Smooth Transition Regression captures nonlinear relationships and allows for varying effects of institutional quality across different contexts. The main results show that two out of the four classes of countries exhibit a resource curse, suggesting that in these contexts, resource wealth does not translate into economic benefits and may even exacerbate poverty. Furthermore, natural resources can have a positive impact on poverty reduction, but this effect depends on certain thresholds of institutional quality. In countries with adequate governance and institutional frameworks, natural resource wealth can lead to significant improvements in poverty.