Commodity Revenues, Agricultural Sector and the Magnitude of Deindustrialization: A Novel Multisector Perspective

Elkhan Richard Sadik-Zada,Wilhelm Loewenstein,Yadulla Hasanli

doi:10.3390/economies7040113

Elkhan Richard Sadik-Zada, Wilhelm Loewenstein + Show 1 more

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https://doi.org/10.3390/economies7040113

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Abstract

This study puts forward a model of a multisector economy and embeds it in a novel theoretical framework to address the relationship between commodity revenues and manufacturing output with a special focus on the role of the agricultural sector. The three-sector model lays the groundwork for analyzing policy choices in more complex sectoral settings. Based on the theoretical analysis, the study identifies the weight of the individual economic sectors in the public revenue generation as a determinant of the magnitude of rent seeking epitomized in the crowding out effect of investments in manufacturing. We find that enclave agriculture contributes to the deindustrialization pressure in the face of natural resource windfalls. The central finding of the multisector analysis is the conclusion that not diversification per se but rather a diversification with the substantial domestic factor or market orientation has the capability to limit the magnitude of deindustrialization. For the empirical validation of the theoretical findings, the study employs fixed effects, fully modified OLS, dynamic common correlated effects estimators and dynamic fixed effects estimators for the dataset of 113 developing and transition economies for 1963–2014 period. The estimations reveal that natural resource revenues correspond with a higher level of the manufacturing sector output. In the economies with a low level of economic diversification, commodity bonanza leads however to the shrinkage of the manufacturing. In the commodity revenue dependent settings, nevertheless, agricultural sector exports have a negative impact on the performance of the manufacturing sector. These findings are in line with the predictions of the theoretical model.

Highlights

The paper at hand puts forward of a novel multisector perspective of resource curse which takes account for the level of economic diversification and patterns of interaction between natural resource rents and other sectors of economy
Model (1) and (2) we analyze the interaction of the natural resource revenue dependence and the level of economic diversity
This study sets out a novel theoretical perspective, which integrates all the major transmission channels of the resource curse and puts forward a theoretical model, which delves into the features of the sectoral structure of the respective economies and enables accounting for more contextual information

Summary

Introduction

The paper at hand puts forward of a novel multisector perspective of resource curse which takes account for the level of economic diversification and patterns of interaction between natural resource rents and other sectors of economy. The proposed model develops an integrated perspective of both purely economic and institutional theories of resource curse, which, in addition, accounts for the differences in the structures of the respective economies. Incorporation of the structural context in the theoretical model, in combination with sophisticated empirical analysis enables the empirical elaboration of the model. Economies 2019, 7, 113 addressed in this inquiry. Both of them are construed from the proposed theoretical model. The first one scrutinizes the nexus between the level of economic diversification and deindustrialization in the face of commodity revenues. The second one analyzes the contribution of the enclave agriculture to the magnitude of the resource course epitomized in the shrinkage of the manufacturing sector

Results

Discussion

Conclusion