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Appendix 1. Country Summaries: Net Oil Exporters
Appendix 2. Country Summaries: Net Oil Importers
Appendix 3. Real GDP Growth in Oil Rich Countries
I would like to thank Carol Baker for her guidance as well as Sharmini Coorey, Andrew Berg, Susan Yang, Era Dabla-Norris and Juliana Araujo for useful comments and suggestions. Errors remain all mine.
The term “Dutch disease” was coined by The Economist newspaper in 1977 to describe the decline of the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959.
See Rodrik (2007) for a detailed discussion on the long-term growth effects of real exchange rate overvaluations: “Overvalued exchange rates are associated with shortages of foreign currency, rent-seeking and corruption, unsustainably large current account deficits, balance of payments crises, and stop-and-go macroeconomic cycles, all of which are damaging to economic growth” (p. 2).
Other explanations for the resource curse at the theoretical level include the volatility of resource-based commodity prices (Ramey and Ramey, 1995), poor linkages between resource and non-resource sectors in an economy (Van Wijnbergen, 1984), and weak institutions and rent seeking (Lane and Tornell, 1994).
In a recent paper, Frankel (2010) explores how the various aspects of resource abundance could lead to “sub-standard” economic performance and provides policy recommendations based on actual measures taken in some resource-abundant countries.
A third group of studies find that natural resource abundance has not been a significant structural determinant of economic growth. See for example Gelb (1988), Davis (1995), Manzano and Rigobon (2001), Stijns (2005) and Collier and Hoeeffler (2009).
More recently the DD phenomenon has also been associated with any development that induces a large inflow of foreign currency; including foreign aid (IMF 2003).
Hausmann and Rigobon (2002) proposed an alternative mechanism for explaining the resource curse through DD based on the interaction between the degree of specialization in non-tradables activities and the existence of financial market imperfections.
There is a recent line of research on this matter (see Magud and Sosa, 2010 for a comprehensive survey), focusing mainly on the role of productivity, the degree of flexibility in labor markets, employment and the existence of rigidities. Early theoretical contributions on the relationship between DD and economic growth include Van Wijnbergen (1984), who shows that DD negatively affects growth if the latter is determined by learning-by-doing in the tradables sector. On the study of the welfare impact of a resource-based exports sector boom, Edwards and Aoki (1983) show that DD is not really a disease under a permanent appreciation of the real exchange rate.
More recently, research has focused on the real exchange rate effects stemming from remittance flows to Latin America and the Caribbean (see for example Amuedo-Dorantes and Pozo, 2004) and foreign aid to low income countries in Africa (see Rajan and Subramanian, 2005, 2009, and IMF, 2005).
At the country level, it appears that the discovery and exploitation of oil tends to induce a relatively short-lived increase in total GDP growth with virtually no long-lasting effects (Appendix 2).
An ordinary least squares (OLS) regression of non-oil GDP growth against a linear trend in the net oil-exporting group yields a positive and significant coefficient of 0.52. The estimated coefficient for net oil importers of 0.36 is not significant.
Part of this observation may reflect the role of public investment in economic activity. In Equatorial Guinea, for example, virtually the entire oil windfall has been used to finance infrastructure investment, supporting construction activity (computed as part of non-oil GDP).
Theoretically, under the assumption of DD, changes in total GDP growth depend on whether the effect of faster-growing resource-based and services activities is larger than the effect of slower-growing (or possibly contracting) non-resource tradable activities. Also, traditional models do not focus on the growth or welfare implications of DD. They analyze only the resource-movement effect (manifested as a relocation of labor across sectors) and the spending effect (manifested as a [sustained] appreciation of the real exchange rate (Section II).
While it is difficult to accurately measure the evolution of productivity in these countries, we look at the dynamics of employment in the following section.
Ideally, we would like to look at payroll and/or employment/unemployment indicators. Unfortunately, job-market data is very limited.
We exclude Guinea-Bissau from the group of net oil importers on account of limited data availability.
An alternative explanation could be that the productivity gains in the agricultural sector of oil-exporting countries are such that the relative demand of labor is shrinking when compared with that in oil-importing countries. We think this is less plausible, and in fact we would not be surprised to find otherwise: that is, productivity gains in the agricultural sector may be larger in oil-importing countries, precisely because of the absence of oil. Also, it is worth noting that the resource-movement effect assumes full employment, which is not the case in many of the countries considered in this chapter. As noted earlier, this assumption is among those questioned by nontraditional models of DD.
This is likely to hold taking into account demographics or population growth.
We calculate the (partial) correlation coefficient and its statistical significance between the series for growth and real exchange rate changes without making any exogeneity assumptions. We implicitly estimate an equation of the form yi,t=αi+βixi,t+ui,t and attempt to exploit the panel information by estimating fixed effects and country-specific coefficients, where xi,t is the change in the real effective exchange rate in country i at time t and yi,t is GDP growth in country i at time t. We do not make any assumptions regarding causality, but rather explore whether there is a statistically significant correlation between these variables. A negative and significant correlation would suggest DD symptoms.
Eichengreen (2008) provides an ample discussion on the role of the real exchange rate in the growth process, the channels through which it influences other economic variables, and various policy options to affect it. See also Krugman and Taylor (1978) and Edwards (1986, 1989), who discuss the contractionary effects of nominal (and real) devaluations.
The Republic of Congo was among the continent’s largest oil producers. However, it endured a conflict that ended in 2003. Since then, it has made significant progress on stimulating recovery with the cooperation of multilaterals, while the economy has become more resilient. Yet, important development challenges remain. See IMF (2011).
This is consistent with Eichengreen (2008), which concludes that analyses of the correlation between growth and the (level or volatility) of the real exchange rate produce a variety of statistical results. See also Harberger (2003).
In Vegh’s setup, this outcome would be obtained if government spending were biased toward tradables, although government spending continues to produce a negative wealth effect on the private consumer.
Explanatory variables include terms of trade, a measure of relative productivity, net foreign assets, foreign aid flows, and remittance flows.
Aydin (2011) explores the resource curse for a group of 150 low and middle-income countries between 1973 and 2008. The author finds evidence suggesting that growth benefits from availability of natural resources after taking into account differences in macroeconomic management and structural indicators. Interestingly, the author also finds that real exchange rate depreciation improves competitiveness and thus growth, but also that fiscal austerity leads to higher growth.
In this sense, the “disease” nature of oil-abundance could be posed as a question of using oil-related revenue to improve welfare for the current and future generations.