Political scientists and economists have long argued that resource wealth undermines the development of political and governance institutions by fostering a rentier institutional culture. The indirect effect of natural resources on development comes from the potential adverse effects of resources on institutional quality. The cumulative direct effect of resources on long-term development can thus be either positive or negative, depending on the balance between these offsetting effects. The latest oil price crash that triggered fiscal crisis in major petroleum-producing countries like Russia, Nigeria, and Saudi Arabia is one example of this negative effect. In the long-term, however, uncertainties associated with declining and volatile terms of trade for commodities can undermine public finance and discourage investment. On the positive side, natural resources generate economic rents that can be used for public good provision and other productive purposes. The direct effect includes several economic factors with both positive and negative components. Figure 1 identifies two important channels: a direct economic effect and an indirect institutional effect. One major reason for the lack of consensus on how resources affect development is that more than one explanation might be true at the same time.
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