Development in U.S. States, Economic Freedom, and the "Resource Curse"

This paper uses the index published in Economic Freedom of North America (Karabegović and McMahon, 2008) to examine the impact of the relationship between resource dependence and institutional quality on economic development in US states. A vast amount of literature supports the existence of a seemingly paradoxical negative correlation between natural resources and economic development, which has come to be known as the "resource curse." Studies have shown that resources can indeed crowd out such factors as investment, education, and the economy's efforts at industrialization, a situation now known as Dutch Disease, named after the experience of the Netherlands when the discovery of natural-gas fields led to a decline of the manufacturing sector.

This paper uses the index published in Economic Freedom of North America (Karabegović and McMahon, 2008) to examine the impact of the relationship between resource dependence and institutional quality on economic development in US states. A vast amount of literature supports the existence of a seemingly paradoxical negative correlation between natural resources and economic development, which has come to be known as the "resource curse." Much of the recent literature on the resource curse has been focused on the possible causes of this economic phenomenon. Sachs and Warner (2001) summarized the various explanations of the resource curse by saying that an abundance of natural resources will crowd out certain factors that are conducive to growth. Studies have shown that resources can indeed crowd out such factors as investment, education, and the economy's efforts at industrialization, a situation now known as Dutch Disease, named after the experience of the Netherlands when the discovery of natural-gas fields led to a decline of the manufacturing sector.