On the conflict of natural resources abundance and export upgrading in upper-middle and high-income countries

Abstract

Globalization created immense competition among economies in international markets, which spurs the need for export upgrading and the effective use of natural resources to avoid the Dutch Disease phenomenon. This study investigates the direct and indirect effect of natural resources via infrastructure development on export upgrading. This research constructs a panel of 55 countries with upper-middle-income (UM) and high-income (HI) economies from 2010 to 2018. Export upgrading is measured from export sophistication score based on SITC 3-digit level exports and GDP per capita (PPP, constant US$ 2017). Moreover, the principal component analysis is applied to logistic (LGC), banking (BNK), digitalization (DGT), and telecommunication (TLC) sectoral infrastructure to measure the development level of infrastructure. To overcome the problem of cross-sectional dependence, this study applies within estimator with Driscoll-Kraay standard errors. This study explores the indirect influence of natural resource rent as a moderator between export sophistication and infrastructure development. On the other hand, natural resources positively impact export upgrading via infrastructure development. The thought behind this indirect effect is that a country effectively boosts its production structure and exports when it uses the money it earns from natural resources and the government earnings collected during the boom in the aggregate economic activity generated by natural resources to develop its banking, telecommunication, logistics, and information technology. Our results suggest that to avoid the phenomenon of Dutch Disease, such countries should invest earnings earned from natural resources in developing sectoral infrastructure.