Oil-Price Boom and Real Exchange Rate Appreciation
Is there Dutch Disease in the Cemac?

Contributor Notes

Author’s E-Mail Address: jtrevino@imf.org

The paper employs a heuristic comparative approach suggested by Ismail (2009) to search for evidence of Dutch disease in oil-rich countries of the Central African Economic and Monetary Community (CEMAC). While these countries have benefitted from high international oil prices in recent years, they have also experienced relatively large real exchange rate appreciations, raising concerns regarding the presence of Dutch disease and casting doubts on their ability to achieve high growth and employment in the long run. To isolate from any dynamics related to the exchange rate regime, we focus on the 14 member countries that constitute the CFA franc zone. We separate them into net oil importers and net oil exporters and look at economic growth, the real exchange rate, and the agricultural and external sectors. Based on traditional models, our findings are broadly consistent with the presence of Dutch disease in the second group during the oil-price boom. Departing from these models yields mixed results, suggesting the need to employ a case-by-case approach.

Abstract

The paper employs a heuristic comparative approach suggested by Ismail (2009) to search for evidence of Dutch disease in oil-rich countries of the Central African Economic and Monetary Community (CEMAC). While these countries have benefitted from high international oil prices in recent years, they have also experienced relatively large real exchange rate appreciations, raising concerns regarding the presence of Dutch disease and casting doubts on their ability to achieve high growth and employment in the long run. To isolate from any dynamics related to the exchange rate regime, we focus on the 14 member countries that constitute the CFA franc zone. We separate them into net oil importers and net oil exporters and look at economic growth, the real exchange rate, and the agricultural and external sectors. Based on traditional models, our findings are broadly consistent with the presence of Dutch disease in the second group during the oil-price boom. Departing from these models yields mixed results, suggesting the need to employ a case-by-case approach.

I. Introduction

The Dutch disease (DD) phenomenon emerges when the development of a natural resource-based sector, induced from sudden abundance or a price increase, occurs at the expense of a non-resource traded goods sector.2 The most commonly observed effects of DD are the reallocation of factors of production, a sustained appreciation of the real exchange rate and de-industrialization. These observations arise from what has been dubbed in the literature as the resource-movement and spending effects.

In this paper we search for indications of DD in the oil-rich countries of the Central African Economic and Monetary Community (CEMAC). In recent years, these countries have benefitted from high international oil prices and new discoveries. However, they have also experienced sustained real exchange rate appreciations, making non-resource sectors less competitive and casting doubts on their ability to diversify and achieve high output growth and employment over the long term, especially once oil is depleted.3

We employ a heuristic comparative approach suggested by Ismail (2009), focusing on the 14 member countries that constitute the CFA franc zone and separating them into net oil-importers and net oil-exporters (Figure 1). Along with various structural similarities such as high unemployment, poor business environment and limited infrastructure, these countries are all pegged to the euro. Also, by limiting the analysis to CFA zone countries, we remove any dynamics related to the exchange rate regime. In this sense, net oil importing countries are considered as a counterfactual to net-oil exporters.

Figure 1.
Figure 1.

Classification of Countries in the CFA franc Zone

Citation: IMF Working Papers 2011, 268; 10.5089/9781463924676.001.A001

1 Economic and Monetary Community of Central Africa.2 Western African Economic and Monetary Union.

As a first step, we explore the presence of possible benefits from oil abundance and high international prices by comparing overall economic performance in the two groups of countries over time. We then compare the evolution of their real exchange rates and how they correlate with economic growth. Then, departing from traditional DD models, we also analyze the developments in the agricultural and external sectors and the evolution of various fiscal indicators, because some of these models’ assumptions and implications may not suit the reality of the countries analyzed.

We find a relatively large appreciation of the real exchange rate and a rapid shift of labor away from the agricultural sector at the aggregate level in oil-rich countries. Based on traditional models, this is fully consistent with the presence of DD. However, this phenomenon seems not to affect overall economic performance, because we find no significant long-term relationship between real exchange rate dynamics and (non-oil) GDP growth at the aggregate level. In fact, we find that real exchange rate appreciation is associated with higher rather than lower growth in some cases.

Departing from traditional models yields mixed results and the observed differences across countries warrant a case-by-case approach. While in some countries the presence of DD appears evident, in others the evidence is less clear-cut. Traditional models rely on the assumption of full employment and ignore the role of fiscal policy regarding the use of oil-related revenue for public investment, as in Equatorial Guinea for example. Moreover, in most countries the manufacturing sector was already very small (if not absent) before oil was discovered, and there is significant dependence on imports of intermediate and capital goods.

II. The Resource Curse and The Dutch Disease

DD is one of various explanations of the (natural) resource curse, which refers to the seemingly counterintuitive observation that resource-abundant countries often appear to grow more slowly than those with fewer resources.4 As Iimi (2010) puts it, “…abundant natural resources could promote growth, since resource richness can give a ‘big push’ to the economy through more investment in economic infrastructure and more rapid human capital development. Therefore, any resource-rich country must attain higher growth rates…”

While there is a general perception among applied economists and policymakers of a resource curse, empirical evidence is mixed. Sachs and Warner (1997, 1999 and 2001) and Gylfason, Herbertson and Zoega (1999) are among the most adduced studies that find evidence of a negative relationship between resource abundance and economic performance.5 There are, however, various studies that find evidence in the opposite direction, namely, that resource abundance increases growth, such as van der Ploeg (2011), Lederman and Maloney (2007) and Cavalcanti Mohades and Raissi (2009).6

The DD phenomenon arises when the development of a natural resource-based sector (owing to the existence of increasing returns in that sector) occurs at the expense of a non-resource traded goods sector (Corden and Neary, 1982).7 Relative-price changes induce a reallocation of factors of production away from the resource-based sector (the resource-movement effect) and an increase in the demand for non-traded goods (the spending effect), favoring an appreciation of the real exchange rate.8

While the theoretical literature on DD is extensive, little analysis has been done regarding its welfare effects and implications for long-term growth.9 Nonetheless, the general perception derived from the literature is that potential losses in competitiveness and de-industrialization (or specialization rather than diversification), may lead to lower long-term growth. However, as Hausmann and Rigobon (2002) put it, “[the logic behind the DD phenomenon in the literature] by itself does not imply any inefficiency or welfare loss. It only states that booms in resource income would be associated with contractions in manufacturing, not in overall growth. It cannot explain why a country would grow more slowly, just because it has oil.” In fact, recent literature on DD has started to dispute the negative implications of this phenomenon.10

Empirically, the study of the DD phenomenon has focused on the impact of resource-abundance on the real exchange rate and the reallocation of resources across sectors.11 As such, it has been typically identified through the observation of a decline in manufacturing output or de-industrialization, an expansion of services activities, and an appreciation of the real exchange rate. Evidence, however, shows mixed results and, to some extent, it departs from pure DD arguments, because the resource curse is in many cases a function of factors such as human capital, quality of institutions and public policy actions.

Case-studies on African countries include Sala-i-Martin and Subramanian (2003), who argue that in Nigeria the negative and nonlinear impact of natural resource abundance on growth arises from its effect on institutional quality. They conclude that waste and corruption from oil (rather than DD) is responsible for Nigeria’s poor long-run economic performance. Iimi (2006) explores the case of Botswana, a strong resource-abundant performer in sub-Saharan Africa, concluding that governance determines the extent to which the growth effects of resource wealth can materialize, and that the DD argument has little effect on the linkage between natural resource abundance and economic development (Sarraf and Jiwanji, 2001).

Another study for Africa by Benjamin, Devarajan and Weiner (1989) explores the case of Cameroon. The authors argue that the treatment of tradables in traditional DD models may not be plausible for some countries. They separate tradables into exportables (mainly agriculture) and importables (manufactures) and assume that locally produced goods are imperfect substitutes for importables. In this fashion, they calibrate a multi-sector model for Cameroon under an oil-abundance scenario. Because the effects of real exchange rate appreciation vary across sectors, oil abundance results in fast growing nontraded activities, a large decline in exportables and a boom in importables.

Finally, IMF (2009) analyzes the case of Chad, concluding that the effects of DD are hard to evaluate, not only because of lack of information but also because the non-oil sector is highly underdeveloped (agriculture was the most important activity before the discovery of oil); cotton production has been mired in problems not worsened by oil production, yet oil rents might have reduced the incentives to proceed with reforms in that sector. After exploring the dynamics of several indicators, the paper concludes that there is little evidence to support the presence of DD, with the exception of a significant increase of the wage bill, likely explained by the expansion of government expenditure during the oil boom (expenditure effect), rather than by shifting labor toward oil production/refining (resource-movement effect).

III. Resource Curse and Dutch Disease in CEMAC: What Do the Data Suggest?

A. Oil Abundance and Economic Performance

This section compares the evolution of economic activity between the two groups that make up the CFA franc zone, namely net oil exporters and net oil importers, to identify the so-called resource curse. Because net oil-exporting countries discovered and started exploiting oil at different times (Box 1 and Appendix 1), we look at total and non-oil GDP growth for various subsamples between 1970 and 2009. We take into account the regional devaluation that occurred in 1994 and consider 2002–09 an oil-boom episode, because high international prices of oil led to significant terms-of-trade improvements in oil-rich countries (Figure 2).12

Figure 2.
Figure 2.

International Prices and Terms of Trade in the CFA Franc Zone, 1980–2009

Citation: IMF Working Papers 2011, 268; 10.5089/9781463924676.001.A001

Source: International Monetary Fund.

At a first glance, evidence appears to support the presence of a resource curse in the CFA franc zone (Table 1). With the exception of 2002–09, since 1990 average annual growth of total real GDP in net oil-exporting countries has been lower and more volatile than in net oil-importers.13 However, the non-oil component of GDP has grown at least as much in all but one episode (1994–2001), and the difference in favor of net oil exporters is especially high since 2002. Moreover, non-oil GDP growth exhibits an upward trend for net oil-exporting countries over time (Figure 3), which is not the case for net oil importers.14

Figure 3.
Figure 3.

Non-Oil Real GDP Growth in the CFA Franc Zone, 1990–2009

Citation: IMF Working Papers 2011, 268; 10.5089/9781463924676.001.A001

Source: Author’s calculations with IMF data.
Table 1.

Average Annual Growth in the CFA Franc Zone1

article image

Standard deviations in parentheses.

Source: International Monetary Fund.

These observations suggest a positive spillover from the oil sector into the rest of the economy, contradicting the idea of a resource curse or a “disease”.15 However, they may also reflect that the expansion of the non-tradables sector (services activities) has more than compensated a possible contraction of non-resource tradables activities, fully consistent with the traditional DD hypothesis (more specifically the resource-movement effect) and of potential concern in the sense that oil-rich economies may become increasingly undiversified.16

Crude Oil Production in Oil Rich Countries of the CFA Franc Zone

article image
Sources: United States Energy Information Administration (http://www.eia.doe.gov/) and IMF.

B. The Spending Effect

One of the most common manifestations of the spending effect is a sustained appreciation of the real exchange rate. Put simply, real exchange rate appreciation results from an increase in the relative prices of domestic goods and services owing to an increase in aggregate demand. Higher wages in the resource-based sector lead to higher wages in other activities. The wealth effect associated with the increase in overall wages leads to higher demand for domestically produced goods and services and hence higher prices.

Real exchange rate dynamics are fully consistent with the spending effect (and hence with DD) in oil-rich countries of the CFA franc zone. Jointly, these countries have experienced a large and sustained appreciation of their real exchange rate relative to net-oil importers since 1994, accelerating after 2000 (Figure 4). While the latter group experienced a cumulative real exchange rate appreciation of about 10 percent between 1994 and 2009, the former accumulated about 30 percent. Similarly, real exchange rate appreciation in net oil exporters has doubled that in net oil importers since 2000.

Figure 4.
Figure 4.

Log of the Real Exchange Rate in the CFA Franc Zone, 1990–20091

Citation: IMF Working Papers 2011, 268; 10.5089/9781463924676.001.A001

Source: Author’s calculations with IMF data.1 An increase denotes an appreciation.

Alternatively, this higher real exchange rate appreciation in oil-rich countries may simply reflect the relative size of the terms-of-trade shock, because the international price of oil increased more than nonfuel commodity prices (Figure 2). From an equilibrium perspective, if the oil-price shock and its impact (or oil abundance) were permanent and therefore the terms-of-trade gains were also permanent, then the observed real appreciation in net oil-exporters would be fully consistent with a transition toward a new equilibrium real exchange, contradicting the DD argument (Edwards and Aoki, 1983). To the extent that productivity gains supporting real exchange rate appreciation were present in these countries, one could also refute DD in the sense that such gains might be indicative of productive diversification.17

C. The Resource-Movement Effect

An empirical implication of the resource movement effect is the relocation of labor away from traditional activities and into the resource-based sector. We look at the annual growth rate of the number of individuals employed in agricultural activities over time.18 This variable has declined steadily in oil-exporting countries since 1990 (Figure 5), and the decline accelerated between 2003 and 2007. In oil-importing countries, on the contrary, this variable has remained relatively stable, with a slight upward trend since 1994.19 This observation is consistent with the DD phenomenon, as it may reflect a shift of potential labor away from traditional activities and into oil-related activities that is not present in net oil-importing countries.20,21

Figure 5.
Figure 5.

Economically Active Population in Agriculture in the CFA Franc Zone, 1990–2009

(annual growth rate)

Citation: IMF Working Papers 2011, 268; 10.5089/9781463924676.001.A001

Source: Author’s calculations with WB data.

Sectoral Output

A shift of resources away from traditional (tradable) activities into the resource-based sector would imply a change in the contribution of each sector to (non-oil) output over time. The share of non-oil primary activities to (non-oil) GDP in net oil-exporting countries has risen over time ((Figure 6, leftmost panel), with a hump in 2007–08. At the same time, after a mild trend decline, the share of secondary non-oil activities to non-oil GDP in these countries increased notably in 2009 (center panel), while tertiary activities declined steadily (rightmost panel). Admittedly puzzling, the first and third observations, namely, an increase in traditional traded activities (agriculture) and a decline in non-traded activities (services) in net oil-exporting countries, appear to contradict the DD paradigm.

Figure 6.
Figure 6.

Composition of Non-Oil Real GDP in the CFA Franc Zone, 1990–2009 (percent)

Citation: IMF Working Papers 2011, 268; 10.5089/9781463924676.001.A001

Source: Author’s calculations with IMF data.* Data for Cameroon are not available.

Non-Oil Exports

Another indication of the resource movement effect is a deterioration of the non-oil trade balance owing to a decline in non-oil-related exports. Between 2001 and 2008 non-oil exports to non-oil GDP were consistently lower in oil-rich countries relative to net oil-importing countries (Figure 7), consistent with DD. Interestingly, they appear to decline less rapidly in net oil-exporting countries during the period, contrary to a DD argument during the oil boom. However, the volume of non-oil exports declined sharply in oil-rich countries since 1998, while it showed a steady increase since 1999 in the group of oil importers, supporting the presence of a resource movement effect and consistent with DD.

Figure 7.
Figure 7.

Non-Oil Exports in the CFA Franc Zone, 1980–20091

Citation: IMF Working Papers 2011, 268; 10.5089/9781463924676.001.A001

Source: Author’s calculations with IMF data.1 Togo data is unavailable, while Cote d’Ivoire’s non-oil exports are “abnormally high” relative to both oil-importing and oil-exporting countries (possibly because of strong diamond exports).

IV. Real Exchange Rate Appreciation and Growth: A Positive Correlation?

As we have mentioned, existing empirical literature on the growth effects of resource abundance and DD is sparse, and the results are mixed. For the group of countries under study here, however, the observation (Figure 3) that non-oil real GDP growth has a positive and significant slope in net oil exporters since 1990, combined with a relatively more rapid appreciation of the real exchange rate after the 1994 devaluation, appears to contradict what conventional models suggest. Thus, as a first approach, we look at the statistical relationship between economic growth (both oil and non-oil) and real exchange rate changes.22

The correlation coefficient (ρ) between real exchange rate changes and GDP growth is not significant for either subgroup between 1990 and 2009 regardless of the GDP measure (Table 2, left panel). For 2000–09 (Table 2, right panel), however, there is a negative and weakly significant correlation between changes in the real exchange rate and non-oil GDP in oil-rich countries, suggesting the presence of DD. For net oil importers the sign of the correlation is positive and significant, pointing to the idea that real exchange rate appreciation can be associated with higher growth in those countries.23

Table 2.

Real Exchange Rate Changes and GDP Growth in the CFA Franc Zone

article image
Standard errors in parenthesis.

90% of confidence.

The correlation coefficients are highly sensitive to the sample period. If the sample is reduced by two years (2002–2009), the correlation between non-oil GDP growth and real exchange rate changes switches to positive (and significant) for oil-rich countries (Figure 8). This supports the idea that the real exchange rate appreciation observed during the period (associated with the terms-of-trade gains) favored higher growth in non-oil-related activities of oil-abundant countries. Alternatively, this could indicate that higher aggregate spending (possibly reflecting public spending of the oil wealth) resulted in both an increase in non-traded goods prices (and hence real exchange rate appreciation) and higher (non-oil) GDP growth, through higher construction and services output. This, however, is not fully supported by the observation in the previous section that the share of tertiary activities in non-oil GDP declined in net oil-exporting countries, while the share of secondary non-oil activities spiked only in 2009.

Figure 8.
Figure 8.

Non-Oil GDP Growth and Real Exchange Rate Changes, 2002–09

Citation: IMF Working Papers 2011, 268; 10.5089/9781463924676.001.A001

Source: International Monetary FundStandard errors of slope in parenthesis

The results also are very sensitive to the inclusion of Equatorial Guinea. Allowing for cross-section-specific slopes yields a negative and strongly significant correlation coefficient only for Equatorial Guinea (-0.98) and the Congo (-0.59). In fact, the correlation coefficient estimated in Figure 8 falls to 0.06 and is not significant when Equatorial Guinea is excluded from the regression. As of 2008, Equatorial Guinea was the third largest hydrocarbons producer in sub-Saharan Africa (Box 1), behind only Angola and Nigeria. Moreover, in Equatorial Guinea an important share of the oil windfall has been poured into the economy through public investment in infrastructure (construction), favoring strong growth in the nonoil sector.24 Hence, the evidence presented should by no means be considered conclusive and a case-by-case analysis is warranted.25

V. The Role of Fiscal Policy

The effects of fiscal policy on both the real exchange rate and economic growth have been widely explored. Early work by Sachs and Wyplosz (1984) for example, provides analytical work on the impact of public spending on the real exchange rate. In their setup, the authors assume full price flexibility (and hence no effects on real economic activity). The broad result is that the response of the real exchange rate to changes in public spending is ambiguous, as opposed to the conventional belief that higher public spending induces an appreciation on impact and a long-run depreciation. The authors explain that their findings are not robust to varying assumptions about the degree of asset substitutability (foreign versus domestic bonds) or to the composition of government spending (tradables versus nontradables).

More recently, Vegh (2011) provides a more conventional microfounded framework for the analysis of the impact of various policy changes on the relative price of traded to non-traded goods (the real exchange rate). In his setup, the real exchange rate effect of an increase in public spending depends on the composition of such spending. A permanent increase in public spending will lead to a real exchange rate appreciation if such spending is biased toward nontradables relative to private spending. The effect of a temporary increase in public spending on the real exchange rate will depend on the substitutability between tradables and nontradables and the composition of public spending. Assuming that there is some degree of substitutability (rather than complementarity), a temporary increase in public spending of non-traded goods leads to a temporary real exchange rate appreciation, whereas a temporary increase in public consumption of tradables leads to a real exchange rate depreciation.

Empirically, Vegh (2011) explains that regression methods focusing on Asian and Latin American developing countries point toward the idea that increases in public spending induce real exchange rate appreciations, in line with both existing models and conventional belief. Conversely, Monacelli and Perotti (2007), estimate a structural vector autoregression (VAR) for the US, Canada, the UK and Australia and find that an increase in public spending induces a real exchange rate depreciation. The authors argue that conventional models predict, contrary to the data in those countries, that private consumption falls as a result of an increase in public spending owing to a negative wealth effect.26 Monacelli and Perotti explain that “ranging from the traditional apparatus of the Mundell-Fleming model to the more recent New Open Economy Macroeconomics, the issue of how changes in fiscal policy affect the competitiveness of a country and its external balance remains a classical textbook question in macroeconomics.” As Vegh (2011) puts it, “estimating the impact of changes in fiscal spending on the real exchange rate has proved to be a hard task.”

Little has been done empirically for sub-Saharan African countries on how fiscal policy affects the real exchange rate. Related work by Aydin (2010) finds no significant explanatory effect of government consumption (to GDP) on the determination of the equilibrium real exchange rate for a panel of 182 countries from 1973 to 2014 (using IMF forecasts).27 The author shows that the results remain unchanged when looking at the group of countries in sub-Saharan Africa and at the subset of net oil-importing countries in that region. This nonsignificance is somewhat surprising given the relative size of the government in many of the countries considered. A possible explanation is that rather than public consumption, it is public investment that matters for real exchange rate determination in these countries (or their sum). From a theoretical point of view, it is possible that the assumption of a nontradables bias in government spending does not hold; and the effect cancels out.28

In the present case, we see that oil-related revenue rose from about 8 percent of GDP in 2003 to a peak of nearly 17 percent in 2008 in oil-rich countries. This supported an increase in government spending, especially in investment, compared to previous years (Figure 9), likely affecting growth (at least in the short term) and the real exchange rate. The extent to which this increase in public spending has a positive impact on productivity and growth in the long term remains to be seen. While infrastructure investment may provide a base for sustained growth and improve welfare, there is concern that oil-rich economies become less diversified and increasingly vulnerable to oil-price developments, posing a risk to maintaining external stability.29

Figure 9.
Figure 9.

Government Spending to GDP in the CFA Franc Zone, 1990–2009

Citation: IMF Working Papers 2011, 268; 10.5089/9781463924676.001.A001

Source: Author’s calculations with IMF data.* Data for Cote d’Ivoire and Mali are not available.

VI. Conclusions and Further Research

In this paper we found mixed evidence of DD in oil-rich countries of the CEMAC region. Using a heuristic comparative approach suggested by Ismail (2010), we looked at the 14 member countries that make up the CFA franc zone, separating them into net oil exporters and net oil importers. By limiting the analysis to this set of countries, any dynamics related to the exchange rate regime were removed and net oil-importing countries were considered counterfactual to net oil exporters.

Based on traditional models, the observed appreciation of the real exchange rate and the rapid shift of labor away from the agricultural sector in oil-rich countries are both fully consistent with the presence of DD at the aggregate level. However, there is no strong evidence in favor of a resource curse, as oil abundance does not appear to be correlated with overall economic performance in the long term. In fact, real exchange rate overvaluation is associated with higher rather than lower growth in some cases. The question is what the welfare implications might be once oil is exhausted given the seemingly absent impact on long-term growth.

Because departing from traditional models yields mixed results, we suggest the need for a case-by-case approach. Many of the DD assumptions appear not to suit the reality of some of the countries analyzed here and the results are very sensitive to the sample period and the inclusion of specific countries. Moreover, traditional models ignore the role of fiscal policy regarding the use of oil-related revenue for public investment. Therefore, the evidence presented here should be taken as preliminary and suggestive of further study.

An interesting path of research is to assess whether the long-term implications of resource abundance depend entirely on fiscal policy actions. Because the resource sector is the single most important source of revenue to the government in oil-exporting countries, the idea is to explore the extent to which the oil windfall has been channeled toward productive investment rather than current expenditure, because its “proper” use may contribute to the development of adequate conditions for improving competitiveness, achieving external sustainability and supporting higher growth.

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Appendix 1. Country Summaries: Net Oil Exporters

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Appendix 2. Country Summaries: Net Oil Importers

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Appendix 3. Real GDP Growth in Oil Rich Countries

Figure A2.1.
Figure A2.1.

Real GDP Growth in Oil Rich Countries*

Citation: IMF Working Papers 2011, 268; 10.5089/9781463924676.001.A001

Source: IMF, Indexmundi and United States Energy Information Administration (http://www.eia.doe.gov/).* The vertical lines indicate a relevant breakpoint in the oil industry as indicated in Box 1 above.
*

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.

2

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.

3

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).

4

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).

5

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.

6

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).

7

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).

8

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.

9

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.

10

See for example Nkusu (2004).

11

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).

13

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).

14

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.

15

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).

16

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).

17

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.

18

Ideally, we would like to look at payroll and/or employment/unemployment indicators. Unfortunately, job-market data is very limited.

19

We exclude Guinea-Bissau from the group of net oil importers on account of limited data availability.

20

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.

21

This is likely to hold taking into account demographics or population growth.

22

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.

23

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.

24

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).

25

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).

26

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.

27

Explanatory variables include terms of trade, a measure of relative productivity, net foreign assets, foreign aid flows, and remittance flows.

28

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.

29

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.

Oil-Price Boom and Real Exchange Rate Appreciation: Is there Dutch Disease in the Cemac?
Author: Mr. Juan P Trevino