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Neither Dutch nor disease?—natural resource booms in theory and empirics

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Abstract

For several decades, economists have endeavored to determine whether a sudden surge in mineral and energy extraction activity poses an albatross or boon to an economy. The “Dutch disease” version of the resource curse originates in a traditional model postulating that extensive mineral and energy production induces inter-sectoral adjustments among traded and non-traded industries and that these adjustments tend to crowd out traditional export industries such as manufacturing. This can be acutely detrimental to the long-run growth of an economy when the traditional industries produce positive learning by doing externalities. This chain of events is so frequently cited as being evident in resource-based economies that it has become stylized wisdom. This paper reviews whether modern theoretical models and empirical evidence actually support the Dutch disease. Overall, we find that the Dutch disease is by no means theoretically predicted or empirically evident within resource-based economies.

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Notes

  1. Literature reviews of the resource curse include Ross (1999, 2015), Stevens (2003), Davis and Tilton (2005), Rosser (2006), Wick and Bulte (2009), Frankel (2010), Deacon (2011), van der Ploeg (2011b), Stevens et al. (2015), and van der Ploeg and Poelhekke (2017). The first paper to attribute the resource curse to the DD was Sachs and Warner (1995), based on Matsuyama (1992).

  2. “A researcher who performs an instructive layered policy analysis and exposits the work clearly may see himself as having accomplished the objective of informing policy choice” (Manski 2011, F286).

  3. See also Corden (1984).

  4. Although DD policy discussions and research endeavors arose as a result of hydrocarbon discoveries in Northern Europe, formative research on the subject primarily occurred “Down Under” in response to a booming mining sector, giving rise to the nickname of “the Australian model”. As Corden (1996) explains, British economist James Meade is credited for first having written explicitly about the DD phenomenon when the notion was brought to his attention by Australian economist Eric Russell during Meade’s visit to Australia in 1956, which became the impetus for arguably the very first paper on the subject (Meade and Russell 1957).

  5. The implications of the special case of non-neutral technological progress are addressed in the “Neither disease nor destiny” section below. Papers contemporary to the Corden and Neary model investigating the SE in isolation include Bruno and Sachs (1982), Buiter and Purvis (1982), Eastwood and Venables (1982), Enders and Herberg (1983), Maddock and McLean (1984), and van Wijnbergen (1982).

  6. Cassing and Warr (1985) exhaustively assess the distributional impacts concerning income gains and losses from factor owners in the various sectors and the implications of alternative policy arrangements successfully pursued by aggrieved factor owners.

  7. Gregory (2012) claims the original term for what became known as the Dutch disease was the “Gregory Thesis” originated by C. Hurford, a member of the Australian Parliament.

  8. A critical point that is frequently missed in papers concerning DD.

  9. There is limited empirical evidence examining this effect (Davis 2009; Davis and Vásquez Cordano 2013; James and Smith 2017) due to the lack of good data on income inequality (Ross 2007; Parcero and Papyrakis 2016).

  10. If manufacturing were the accounting unit, the economy would be growing.

  11. For large resource booms that are welfare improving, concerns about intergenerational welfare can be addressed via capital market activities such as sovereign wealth funds that are aimed at smoothing consumption. Norway has undertaken such consumption smoothing.

  12. One can imagine a price distortion that adjusts to keep the proportion of labor in the manufacturing sector at the same level as before the boom. The boom then simply augments output in the agricultural sector, increasing welfare as measured at international prices.

  13. Matsuyama (p. 330) is forced to recognize this implication of his model, but parries by suggesting that there are likely to be technological spillover effects in practice and that such protectionism could then slow economic growth by retarding these spillovers. He nevertheless conjectures that as long as the spillovers are incomplete, there will be a negative link between agricultural productivity and growth.

  14. Corden (1984) makes a similar observation, pointing to agriculture—rather than manufactures—being the major non-energy/mineral export in countries like Nigeria and Australia.

  15. See Rybczynski (1955) for the well-known theorem.

  16. Corden and Neary (1982) examine the case where energy is used as an intermediate good in the manufacturing sector only under the assumption that a boom in the energy sector is triggered by an increase in the exogenously determined world price for energy. Under that scenario, manufacturing unambiguously contracts due to higher energy input prices.

  17. Naim and Tombe (2013) show that rather than being a scourge to Canadian manufacturing, appreciation of Canada’s commodity price sensitive dollar may actually be a boon. Their examination of the Canadian manufacturing sector shows that in excess of 40% of the sector’s intermediate inputs are imported, among the highest in the OECD. Their analysis shows the imported intermediate goods obtained more cheaply with a stronger dollar tend to offset the countervailing negative effect a dearer dollar has on the sector’s competitiveness in global markets.

  18. The heterogeneous sample includes Australia, Belgium, Brazil, Canada, Germany, India, Malaysia, Russia, United Arab Emirates, and the USA.

  19. Smith (2015) finds that with the advent of oil and gas extraction several developing and developed countries experience significant increases in both the size and quality of its labor force. He postulates that the augmentation of these oil and gas producing countries’ labor forces may be attributable to an influx of migrant workers following the hydrocarbons boom.

  20. Wilson (2016) explicitly tackles the question of whether migration is at play. Estimating the elasticity of in-migration in responses to changes in wage rates, the paper shows that a 1% increase in the average wage upped the rate of in-migration by 4.6% in North Dakota, as opposed to only 3.1% in other states. The higher elasticity in North Dakota is attributed to the surge in oil and gas extraction activity occurring in the Bakken region.

  21. See https://www.nbim.no/en/.

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Acknowledgements

The authors would like to thank two anonymous referees for their helpful comments on an earlier draft.

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  1. Arizona Department of Revenue, 1600 W. Monroe, Phoenix, AZ, 85007, USA

    Grant Mark Nülle

  2. Division of Economics and Business, Colorado School of Mines, 1500 Illinois St, Golden, CO, 80401, USA

    Graham A. Davis

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Nülle, G.M., Davis, G.A. Neither Dutch nor disease?—natural resource booms in theory and empirics. Miner Econ 31, 35–59 (2018). https://doi.org/10.1007/s13563-018-0153-z

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