Resource dependence and the causes of local economic growth: An empirical investigation*

Abstract

Previous research has found that regional resource dependence in Indonesia has been positively associated with income growth, contrary to a ‘resource curse’. We test five potential causal mechanisms for this positive effect: spillovers to manufacturing or to agriculture, higher education provision, improved institutional quality and share of public spending on capital. We follow 390 Indonesian districts from 2006 to 2015, using four alternative resource dependence measures, and instrumenting for their potential endogeneity. We first confirm a positive overall effect of resource dependence on real per capita Gross Regional Domestic Product (GRDP), then test whether district resource dependence positively affects manufacturing, agriculture, education, public capital investment and institutional quality. We finally test whether these factors contribute to GRDP while reducing the remaining effect of resource dependence. We find that resource dependence may aid income in part by raising district institutional quality, which in turn raises GRDP. We also find little support for a ‘contingent curse’ hypothesis that resource dependence only benefits districts that already have higher institutional quality.