The Structural Manifestation of the `Dutch Disease’': The Case of Oil Exporting Countries
Prepared by Kareem Ismail*
Authorized for distribution by Ulric Erickson von Allmen
April 2010
Abstract
This Working Paper should not be reported as representing the views of the IMF.
The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.
This study derives structural implications of the Dutch disease in oil-exporting countries due to permanent oil price shocks from a typical model. We then test these implications in manufacturing sector data across a wide group of countries including oil-exporters covering 1977 to 2004. The results on oil-exporting countries are four folds. First, we find that permanent increases in oil price negatively impact output in manufacturing as consistent with the Dutch disease. Second, Evidence in the data shows that oil windfall shocks have a stronger impact on manufacturing sectors in countries with more open capital markets to foreign investment. Third, we find that the relative factor price of labor to capital, and capital intensity in manufacturing sectors appreciate as windfall increases. Fourth, we find that manufacturing sectors with higher capital intensity are less affected by windfall shocks than their peers, possibly due to a larger share of the effect being absorbed by more laborintensive tradable sectors. An implication of the fourth result is that having diverse manufacturing sectors in capital intensity helps cushion the volatility of oil shocks
V. CONCLUSION
This study derives structural implications of the Dutch disease in oil-exporting countries due to permanent oil price shocks from a typical Heckscher-Ohlin model. We then test these implications in a highly-disaggregated manufacturing sector data across a wide group of countries including oil-exporters covering 1977–-2004. The results on oil-exporting countries are four folds.
First, we find that oil booms have resulted in reducing manufacturing output even after several robustness tests. Second, Evidence in the data show that windfall shocks have a stronger impact on manufacturing sectors in countries with more open capital markets to foreign investment. The model explains this result as due to outflow of investment in manufacturing following a declining marginal return on capital, which is due to the expansion of labor-intensive non-tradables. Third, We use the revision 2 edition of the dataset. we find that the relative factor price of labor to capital, and capital intensity appreciate due to windfall increases. The second and third result are consistent with the model when non-tradables are labor-intensive. Fourth, we find that manufacturing sectors with higher capital intensity are less affected by windfall shocks, possibly due to a larger share of the effect being absorbed by the labor-intensive tradable sectors. The conclusion of the fourth result is that a diverse manufacturing sector may be more cushioned from the effect of oil shocks. This is due to capital-intensive sectors being less affected by the increased demand for labor by labor-intensive non-tradables during oil boom, while labor-intensive sectors help cushion adjustment during oil busts by absorbing the labor shed by declining non-tradables. This has a direct policy implication to oilexporters seeking to reduce the exposure of their tradable sector to oil volatility.