Resource boom, productivity growth and real exchange rate dynamics — A dynamic general equilibrium analysis of South Africa

Abstract

This paper studies the impact of a natural resource boom on structural change and real exchange rate dynamics, taking into account the indirect effect that operates through relative sectoral productivity changes. The paper's contribution to the Dutch disease literature is threefold. First, I extend the simple learning by doing productivity specification to include trade barriers and technology gap dynamics, consistent with the modern treatment of productivity growth. Second, I present a dynamic general equilibrium analysis that incorporates imperfect substitution between domestic and foreign goods. Third, I apply the model to South Africa and analyze the macroeconomic impact of increases in gold prices during the 1970s. Political pressure for rapid domestic spending following a surge in resource rents tends to generate myopic government behavior with immediate expansion of government consumption. The model specification captures this fiscal response to higher resource income. Numerical simulations show how the resource boom can help explain the paths of structural change and real exchange rates observed in South Africa. Because of productivity effects, gradual real depreciation follows an initial appreciation of the real exchange rate.