Examining the “Natural Resource Curse” and the Impact of Various Forms of Capital in Small Tourism and Natural Resource Dependent Economies

Abstract

The question of the relevance of human and natural capital, as well as the potential adverse effect of natural capital on economic growth, has gained increased attention in development economics. The aim of this paper is to theoretically and empirically assess the relevance of several forms of capital on economic growth in small economies that are dependent upon tourism or natural resources. The empirical framework is based on Impulse Response Functions obtained from Vector Autoregressive models in which we focus on the model where economic growth is the dependent variable for ten small economies that are dependent upon either tourism or natural resources. We find that there is evidence of the ‘’natural resource curse’’, especially in the economies that have a strong dependence on resources that are easily substitutable and whose prices constantly fluctuate. We further find that in the majority of observed cases the type of capital these small economies are most dependent on for their economic growth causes negative impulses in the majority of the observed periods. The main policy recommendation should be to assure that even these small economies should strive towards further diversification and avoid dependence on only one segment of their economy.