Easy money, easy spending: A new take on the resource curse

by Rabah Arezki (CNRS, FERDI), Hieu Nguyen (Washington University In St. Louis), Frederick Van Der Ploeg (University of Oxford). 

When wealth or income suddenly increases (‘easy money’), this may be directed towards unproductive ‘easy spending’. This column explores the relationship between conspicuous consumption and revenue windfalls using country-specific variations in commodity export prices, and finds that the responses are bigger for luxury than for non-luxury imports. Countries that have higher inequality, weaker control of corruption, or less democracy have significantly higher luxury import responses following a commodity export windfall. These results suggest a novel (conspicuous consumption) channel of the resource curse in the context of weak mechanisms for resource allocation.

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Photo: D. Lentz de Getty Images Signature, Canva