The discovery of natural resources is often accompanied by the construction of new transport infrastructure, connecting the resource to the port from where it gets shipped. In some cases, this infrastructure may be useful to other industries as well, therefore improving a country’s capacity to trade with the outside world. While this new infrastucture will normally lead to a higher total trade, it may also result in trade diversion to the detriment of trade partners connected to older trading routes (by asymmetrically reducing transport costs). This is particularly evident in Africa, where resource-related infrastructure has allowed countries to be better connected to faraway continents than to neighbors, thus contributing to a dismal performance of intra-African trade. We investigate the trade diversion effect of natural resources discoveries in the context of a gravity model of trade. Our main findings are that coastal countries that have more mines trade less than average with neighbors. However – consistently with the idea that this trade diversion effect is due to infrastructure – the opposite is true for landlocked countries. We also find some evidence that the location of mines – specifically, how much “on the way” to a country’s key commercial centers the mines are – also matters for the trade diversion effect. Our results have important consequences for the distributional effect of natural resource discoveries, and may provide some concrete policy advice on how best to transform resource wealth into actual development.

Lunch is provided