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Windfalls, Structural Transformation and Specialization

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  • Karlygash Kuralbayeva
  • Radoslaw Stefanski

Abstract

Macro cross-country data and micro US country data indicate that resource rich regions have small and productive manufacturing sectors and large and unproductive non-manufacturing sectors. We suggest a process of specialization to explain these facts. Windfall revenue induces labor to move from the (traded) manufacturing sector to the (non-traded) non-manufacturing sector. A self selection of workers takes place. Only those most skilled in manufacturing sector work remain in manufacturing. Workers that move to non-manufacturing however, will be less skilled at non-manufacturing sector work than those who were already employed there. Resource induced structural transformation thus results in higher productivity in manufacturing and lower productivity in non-manufacturing. We construct and calibrate a two sector, open economy model of self-selection and show that exogenous cross-country variation in natural resource endowments is large enough to explain the direction and magnitude of sectoral employment and productivity difference between resource rich and resource poor regions. The model implies that low aggregate productivity found in some resource rich countries is not caused by a resource induced decline of a relatively productive manufacturing sector. Rather, the higher manufacturing producvity in those countries is a consequence of manufacturing's smaller size.

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Bibliographic Info

Paper provided by Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford in its series OxCarre Working Papers with number 054.

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Date of creation: 2010
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Handle: RePEc:oxf:oxcrwp:054

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Keywords: Dutch disease; resource rich; resource poor; structural transformation;

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Cited by:
  1. Frederick van der Ploeg & Anthony J Venables, 2012. "Natural Resource Wealth: The challenge of managing a windfall," OxCarre Working Papers 075, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  2. Radoslaw Stefanski, 2014. "Structural Transformation and the Oil Price," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(3), pages 484-504, July.
  3. Huikang Ying, 2014. "Growth and Structural Change in a Dynamic Lagakos-Waugh Model," Bristol Economics Discussion Papers 14/639, Department of Economics, University of Bristol, UK.
  4. Thiemo Fetzer, 2014. "Fracking Growth," CEP Discussion Papers dp1278, Centre for Economic Performance, LSE.
  5. Alwyn Young, 2013. "Structural transformation, the mismeasurement of productivity growth and the cost disease of services," LSE Research Online Documents on Economics 54247, London School of Economics and Political Science, LSE Library.

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