Structural change and sectoral interconnectedness in two resource-abundant economies

Abstract

A historical overview of structural change is presented to motivate the calculation of sectoral factor productivities for Guyana and Suriname using a structural VAR and a novel resource-dominant identification strategy. The paper finds that the extractive sector lowers manufacturing output in Suriname, an oil-based and bauxite-based economy, which indicates first-order resource curse dynamics (FORD). Also, there are strong self-propagation effects of shocks to Suriname's extractive sector, underscoring its enclave-like structure and FORD effects. These results are instructive if not predictive for Guyana – a newly emerging oil economy. In contrast to Suriname, the dataset captures much of Guyana's gold and bauxite mining activities, and the article finds no evidence of FORD effects. Moreover, the empirical results indicate mixed evidence in favor of second-order resource curse dynamics (SORD) in Guyana, i.e., a shock to the non-tradable services sector increases and decreases manufacturing and agricultural output, respectively; while Suriname reports no SORD effects. Finally, manufacturing plays an outsized role in stimulating agricultural output in Guyana, but not Suriname. Manufacturing also reduces the services sector in both economies, indicating that structural change away from petty and non-tradable services is still possible even when manufacturing accounts for a small share of GDP.