Push or Pull? The Relationship between Development, Trade and Primary Resource Endowment

Abstract

We develop a model to capture the interaction between transaction efficiency and primary resource endowment for specialization and development. This interaction leads to four broad patterns of development. Countries with low primary resource endowment can be pushed into development so long as their institutions exhibit sufficient transaction efficiency. Otherwise, development may fail to occur. Similarly, a country may fail to develop because it is 'cursed' by abundant natural resources. If, however, that country has sufficiently high transaction efficiency, it can overcome the 'curse' and develop. But the threshold level of transaction efficiency for development rises as natural resources become more abundant. In this sense, the institutional hurdle for development increases as natural resources become more abundant. We consider the welfare effects of different development paths and also consider how technological development may aid or hinder development.