The Structural Manifestation of the `Dutch Disease’: The Case of Oil Exporting Countries

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.This study derives structural implications of the Dutch disease in oil-exporting countries due to permanent oil price shocks from a typical model. We then test these implications in manufacturing sector data across a wide group of countries including oil-exporters covering 1977 to 2004. The results on oil-exporting countries are fourfold. First, we find that permanent increases in oil price negatively impact output in manufacturing as consistent with the Dutch disease. Second, evidence in the data shows that oil windfall shocks have a stronger impact on manufacturing sectors in countries with more open capital markets to foreign investment. Third, we find that the relative factor price of labor to capital, and capital intensity in manufacturing sectors appreciate as windfall increases. Fourth, we find that manufacturing sectors with higher capital intensity are less affected by windfall shocks than their peers, possibly due to a larger share of the effect being absorbed by more laborintensive tradable sectors. An implication of the fourth result is that having diverse manufacturing sectors in capital intensity helps cushion the volatility of oil shocks.

Natural Resources: Curse or Blessing?

“…These findings hold in pure cross-sections of countries (averages across one, two, three or four decades), in pooled panels of countries, and in panel estimations including dynamics and country fixed effects. Another study uses detailed, disaggregated sectoral data for manufacturing and obtains similar results: a 10.0 percent oil windfall is on average associated with a 3.4% fall in value added across manufacturing, but less so in countries that have restrictions on capital flows and for sectors that are more capital intensive (Ismail, 2010). Using as a counterfactual the Chenery-Syrquin (1975) norm for the size of tradeables (manufacturing and agriculture), countries in which the resource sector accounts for more than 30% of GDP have a tradables sector 15 percentage points lower than the norm (Brahmbhatt, et al, 2010).…”

The Development of the African System of Cities

“…Hence, a major concern for Africa is that resource extraction tends to be heavily mechanised and can crowd out manufacturing by increasing factor prices (Sachs and Warner, 2001); moreover, if manufacturing firms exert positive productivity spillovers that resource firms do not, in principle we can have the so-called Dutch Disease effect (Sachs andWarner, 2001 andIsmail, 2011). That said, recent work by Alcott and Keniston (2014) on US counties argues resource booms can crowd out tradeable manufactures in the short term, but they have little overall impact on long term development.…”

Boom or Gloom? Examining the Dutch Disease in a Two-Speed Economy

“…3 Much theoretical work has analyzed the benefits and costs of energy discoveries (see, e.g., Corden (1984) for a survey), but there have been relatively few empirical studies. Those that have investigated the empirical relationship between a booming energy sector and the macro economy have typically employed a structural vector autoregression (SVAR), which only includes a single sector such as manufacturing in each model, see, e.g., Hutchison (1994) and Bjørnland (1998), or a panel data approach that studies common movements in manufacturing across numerous countries, see, e.g., Ismail (2010). However, neither of these approaches accounts for all of the cross-sectional co-movement of variables within a country.…”