The Varieties of Rentier Experience: How Natural Resource Endowments Affect the Political Economy of Economic Growth * Jonathan Isham Michael Woolcock Middlebury College World Bank Lant Pritchett Gwen Busby Harvard University Yale University This draft: January 8, 2002 Abstract: Many oil- and mineral-rich countries have not fared well since the oil shock of the early 1970s. This paper tests the hypothesis that a developing country’s natural resource endowment affects economic growth through its influence on socioeconomic and political institutions. The paper’s thesis is that different export structures—whether foreign exchange is derived primarily from manufactures, diffuse natural resources, point-source natural resources, or coffee/cocoa natural resources—create differential institutional capacities to manage shocks and reduce social and economic divisions in developing countries. Using one new and one established measure of natural resource abundance as exogenously-determined instruments, we find evidence to support the hypotheses that countries that are abundant (scarce) in point-source natural resources have weaker (stronger) institutional capacities; and that these endogenously determined institutional capacities are significant and large determinants of growth since the oil shock. Specifically, three-stage least-squares estimates show that (a) being a point- source economy is associated with having worse institutions (at least a one standard deviation decrease); and (b) having worse institutions translates into a GPD per capita that, 25 years after the oil shock, is almost 33 percent lower than countries with better institutions. Keywords: economic growth, institutions, natural resource endowment JEL Codes: 013; 050; Z13 * We thank William Easterly, Dani Kaufmann, and Michael Ross for their rapid and informative sharing of data and ideas, and Richard Auty and Jean-Philippe Stijns for useful comments. We also thank the Department of Economics and the Program in Environmental Studies at Middlebury College for research support. An earlier version of this paper (Woolcock, Isham, and Pritchett 2001) was prepared for—and benefited from discussions among other contributors to—the UNU/WIDER Project on Resource Abundance and Economic Growth. Please address comments to jisham@middlebury.edu and mwoolcock@worldbank.org