Natural Resources Rent Dependency and Macroeconomic Instability in Africa

ABSTRACT Macroeconomic instability remains a persistent challenge in Africa, often exacerbated by the volatility of natural resource revenues. While the relationship between resource rents and instability is underexplored and often limited to a few dimensions, this study provides a more comprehensive analysis by investigating the effect of natural resource rents on macroeconomic instability across the continent. It employs the two‐step system GMM strategy to control for potential endogeneity in the macroeconomic model across 54 African countries over the periods 2000–2022. Macroeconomic instability is proxied by a composite score that encompasses macroeconomic shock components of inflation rate fluctuations, exchange rate fluctuations, interest rate fluctuations, and unemployment rates. Natural resource rents are measured as a percentage of GDP, and it integrates forest rents, coal, oil, mineral, and natural gas rents. From the estimated model, the findings reveal a dual impact of natural resource rents on macroeconomic instability, characterized by a negative linear relationship (stabilizing impact) and an increasing non‐linear impact (destabilizing impact) on macroeconomic instability. This pattern is consistent across different macroeconomic dimensions, including labour, financial, goods and services, and foreign exchange markets. Additional robustness tests using disaggregated indicators and resource types confirm the asymmetric effects, showing that the benefits of resource rents are not evenly distributed across sectors. The findings underscore the need for policymakers in Africa and other developing countries to adopt strategies that limit overreliance on resource rents and promote economic diversification. These insights are especially useful for governments and development institutions aiming to enhance macroeconomic stability in resource‐dependent economies.