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Cyclicality of public debt in developing countries: Does dependence on natural resources matter?

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  • Okombi, Idrys Fransmel
  • Mampieme, Vaccili Belneche

Abstract

We revisit the resource curse theory, producing empirical evidence of the importance of natural resources on the cyclical orientation of public debt. Using the Driscoll-Kraay fixed-effects method and panel data from 51 developing countries for the period 1986 to 2020, we show that natural resource rents accentuate the procyclicality of public debt. However, our results suggest that the impact of natural resource endowment in procyclicality does not have the same magnitude when taking into account (i) the disaggregation of public debt, (ii) alternative measures of natural resource rent and (iii) the division of the sample into African and non-African countries. More specifically, natural resource rents amplify the procyclicality of external public debt more than domestic public debt. In addition, we find that while coal and forest rents have no effect on the cyclical orientation of public debt, mineral and especially oil rents do amplify the procyclical nature of public debt. Finally, our results show that the accentuation of the procyclical nature of public debt generated by the interaction between the economic cycle and natural resource endowment is more pronounced in African developing countries than in non-African developing countries. Our results shed new light on the Dutch disease hypothesis, and have relevant policy implications for governments in resource-rich countries wishing to move towards counter-cyclical fiscal interventions.

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  • Okombi, Idrys Fransmel & Mampieme, Vaccili Belneche, 2024. "Cyclicality of public debt in developing countries: Does dependence on natural resources matter?," Resources Policy, Elsevier, vol. 96(C).
  • Handle: RePEc:eee:jrpoli:v:96:y:2024:i:c:s0301420724005981
    DOI: 10.1016/j.resourpol.2024.105231
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    Keywords

    Dependence on natural resources; Cyclicality of public debt;

    JEL classification:

    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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