Rentier effect. A rentier effect is that considerable revenues from the mineral extraction can lower the tax and increase patronage, which can reduce the

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resource abundance will hinder growth depends on the structural characteristics of the economy. More natural resources will lower production if the traded sector has

increasing return to the scale (Torvik, 2001, 2002).

2.1.4 Volatility effect. Another explanation of the resource curse is the volatility effect. The primary products markets are competitive and the buyers enjoy the market power. Countries that are dependent on primary products export may face the problem of the declining terms of trade of the primary commodities. The primary products markets are instable. The highly volatile price may also create uncertainty for the domestic and overseas investors thus hindering further investment (van der Ploeg &

Poelhekke, 2010). The instability of the primary market will also cause volatility in government revenue (Auty, 1998), and make the government hard to carry out prudent fiscal policy (Pieschacón, 2012).

Countries highly rely on a single mineral resource export are most likely to be badly affected by the volatile resource market (Davis & Tilton, 2005). Oil dependent countries such as Venezuela, Russia, and Brazil suffered from an economic downturn because of the long-term relative low oil price. However, evidences have been found in the US copper industry that better governance can prevent the diverse effect of the volatile resource market (Tilton & Landsberg, 1999). Countries like Canada, Chile, Ghana, and Norway have established stabilization funds from the commodity revenue to respond to the possible depressed markets.

2.1.5 Rentier effect. A rentier effect is that considerable revenues from the mineral extraction can lower the tax and increase patronage, which can reduce the demand for government accountability and mitigate dissent (Ross, 2001; Mahdavy,

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1970). The rentier state is a state that the substantial revenues are from the external rents, such as the oil dependent countries, which depend heavily on the oil exports.

Ross (2001) demonstrates three ways that a rentier effect may occur. The first is based on the assumption that tax revenues and nontax revenues have different influence on the populations’ anticipation on the governments’ accountability (Ross, 2004; Brautigam et al., 2008). When a government receives considerable revenues from the natural resources, it correspondingly cut the taxes. The low-taxed population will demand less accountability from the government; and therefore the government will accordingly have lower pressure to improve its governance (Crystal, 1990). The mineral revenues can also increase the governmental spending on patronage, which helps the government to mitigate the dissent among the people. Government can also use the revenues to prevent the society from forming into groups which may inclined to ask for more political rights, thus government will have less pressure to satisfy their appeals as well as improving accountability.

2.1.6 Rent seeking. Another explanation is that resource boom can increase rent-seeking activities and lower economic growth (Tornell & Lane, 1996,1999; Baland &

Francois, 2000; Torvik, 2002). Mineral boom is always associated with rent-seeking behavior to enhance a company’s or an individual’s share on the wealth by getting access to the resources. Rent seeking can affect regional long-term growth if

governments set aside productive activity and pursue profit from the resources (van der Ploeg, 2011). Evidences have also been found that rent-seeking activities lead to social inequality and corruption (Ross, 1999; Sala-i-Martin and Subramanian, 2003;

Gupta, M. S., & Abed, M.G.T., 2002).

Torvik (2002) hold the viewpoint that a resource boom can drive the number of

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entrepreneurs from productive activities to engage in rent-seeking activities. Baland and Francois (2000) denotes that an increase in the resource value will lead to more rent-seeking behavior and decrease aggregate income if a large amount of individuals already engages in rent seeking. By testing effects of the oil boom in late 1970s, they find that countries with small initial industrial base and low entrepreneurship seem to have increased rent seeking upon receiving an oil windfall. Countries with higher industrial base and active entrepreneurship can escape the curse by using the gains to constitute a sound industrial base.

2.1.7 Poor institutional quality. Research has found that natural resource abundance can negatively affect the institutional quality (Bulte et al., 2005; Sala-i-Martin & Subramanian, 2003) and keep the persistence of the low institutional quality (Wiens, 2013). Poor institutional quality may also affect development outcomes.

Alexeev and Conrad (2009) examine the impact of resource abundance by using cross-country regressions. They find a significant negative relation between

institutional quality and the natural point-source resource (such as oil). Subnational and cross-national studies have found evidences that natural resource can increase corruption (Leite & Weidmann, 2002; Vicente, 2010; Ades & Di Tella, 1999;

Treisman, 2000), reduce governmental accountability (Jensen & Wantchekon, 2004), prolong the autocratic leaders’ stay in power (Ross, 2001), and make the government incapable of carrying out effective economic policies (Karl, 1997).

Sala-i-Martin and Subramanian (2003) found a negative relationship between the mineral exports and several governance measures like government effectiveness, political stability, and the rule of law. However, Brunnschweiler and Bulte (2008) do not support the idea that natural resources have a detrimental impact on institutional

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quality and thus hamper economic growth. The impact of this is conditional. It is more likely to happen in autocratic countries (Bhattacharya & Hodler, 2010; Arezki &

Gylfason, 2013), especially when the government has a dominant role in the resource industry (Loung & Weinthal, 2010).

2.1.8 Voracity effect. Tornell and Lane (1999) develop a model in which