The resource curse and private investment: a theoretical model of the impact of corruption

Purpose – A neoclassical model of growth is augmented with the purpose of investigating the relationship between private investment, resource endowments, and corruption. It allows for the possibility that corruption influences the steady‐state growth rate through its impact on private investment, resource endowment management, human capital, and governance. Design/methodology/approach – Corrupt environments critically affect long‐run sustainable economic development through the private investment decision. The groundwork may significantly contribute to emerging economies, particularly Middle East and North African countries with abundant natural resources. Understanding corruption is important for policy recommendations that can fuel the reform agenda. The theoretical model incorporates the potential direct impact and potential indirect effects of corruption on economic output by examining its influence on resource endowment management, the level of private investment and governance. The neoclassical approach is advantageous in that it allows for explicit incorporation of the indirect effects of corruption and potential tradeoffs. Findings – One conclusion is that for highly corrupt countries, the marginal benefit to output of reducing corruption outweighs virtually any other policy action. The importance of strong governance as a mitigating force against corruption's negative effects is also highlighted. In addition, it indicates that the timing of reform efforts is significant. Originality/value – The literature lacks a theoretical framework incorporating the potential indirect effect of corruption on output through resource endowment management and the direct effect of corruption through its impact on governance. The literature has only examined the hypothesized influences separately. The paper explicitly links corruption, resource endowments, private investment, and economic output.