Oil boom, exchange rate and sectoral output: An empirical analysis of Dutch disease in oil-rich countries

Marwan Alssadek,James Benhin

doi:10.1016/j.resourpol.2021.102362

Abstract

This paper examines the Dutch disease in a global sample of 36 oil-rich developed and developing countries for the period 1970 to 2016. It also examines the theory comprehensively by considering the two Dutch disease intermediate effects: spending and resource movement. Using panel data fixed effect with Driscoll-Kraay standard errors estimation approach, our results show that an oil boom causes appreciation in the real exchange rate and a fall in sectoral output, which is consistent with the theory. However, there is significant difference in the effects of oil boom on the real exchange rate and sectoral output among sub-regional groupings, possibly because of differences in the extent of institutional quality and economic policy. The implications of these results are that policy makers of countries affected by Dutch disease should improve institutional quality, minimise real exchange rate appreciation and promote domestic investment in the manufacturing and agriculture sectors. These are necessarily conditions to escape the Dutch disease problem, which hinders economic growth and development.

Highlights

Dutch disease theory has been identified as one of the key explana tions for the resource curse, where countries with an abundance of natural resources experience slower economic growth and development than countries with fewer natural resources (Sachs and Warner, 1995; Frankel, 2012; Badeeb et al, 2017; Stevens et al, 2015)
The results suggest that an oil boom appreciates the real exchange rate in Middle East and North Af rican (MENA), Latin American, European and North American and SubSahara African (SSA) countries, indicting spending effect of the Dutch disease
In contrast with the theory, our results show that oil boom increases output of manufacturing sector in Asian and Pacific and European and North American, challenging the theoretical argument of Corden and Neary (1982), who suggest that Dutch disease affects both developed and developing countries

Summary

Introduction

Dutch disease theory has been identified as one of the key explana tions for the resource curse, where countries with an abundance of natural resources experience slower economic growth and development than countries with fewer natural resources (Sachs and Warner, 1995; Frankel, 2012; Badeeb et al, 2017; Stevens et al, 2015). The paper explores whether an oil boom appreciates the real exchange rate, representing the spending effect It examines whether an oil boom deteriorates the competitive tradable sector (manufacturing and agriculture), representing the resource movement effect. We find that an oil boom causes appreciation in the real exchange rate and a fall in sectoral outputs: manufacturing, agriculture and service sectors in a global panel data sample of 36 oilrich developed and developing countries. This is primarily attributed to spending and resource movement effects respectively, as suggested by the seminal paper on the Dutch disease proposed by Corden and Neary (1982).

Literature review

Empirical results and discussion

Estimates for various regional groupings

Findings

Conclusions and policy implications