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Fiscal policy and Dutch disease

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  • Frederick Ploeg

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Abstract

In this paper we revisit the Dutch disease paying particular attention to the role of specific factors of production and capital stock dynamics. The main insight is that if the natural resource rich windfall is substantial but not large enough for the country to become a rentier, capital goods must be produced at home and adjustment to natural resource windfall takes time. It takes time to build this home-grown capital. Specific factors are crucial to explain the dynamic responses of the real exchange rate, capital intensities and wages in response to a natural resource windfall. If a country is small and the windfall is large, it may be able to import capital and migrant labour in which case the Dutch disease can be avoided.
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Suggested Citation

  • Frederick Ploeg, 2011. "Fiscal policy and Dutch disease," International Economics and Economic Policy, Springer, vol. 8(2), pages 121-138, June.
  • Handle: RePEc:kap:iecepo:v:8:y:2011:i:2:p:121-138
    DOI: 10.1007/s10368-011-0191-2
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    References listed on IDEAS

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    1. Frederick van der Ploeg & Anthony J. Venables, 2011. "Harnessing Windfall Revenues: Optimal Policies for Resource‐Rich Developing Economies," Economic Journal, Royal Economic Society, vol. 121(551), pages 1-30, March.
    2. Brunnschweiler, Christa N. & Bulte, Erwin H., 2008. "The resource curse revisited and revised: A tale of paradoxes and red herrings," Journal of Environmental Economics and Management, Elsevier, vol. 55(3), pages 248-264, May.
    3. van der Ploeg, Frederick & Poelhekke, Steven, 2010. "The pungent smell of "red herrings": Subsoil assets, rents, volatility and the resource curse," Journal of Environmental Economics and Management, Elsevier, vol. 60(1), pages 44-55, July.
    4. Paul Collier & Rick Van Der Ploeg & Michael Spence & Anthony J Venables, 2010. "Managing Resource Revenues in Developing Economies," IMF Staff Papers, Palgrave Macmillan, vol. 57(1), pages 84-118, April.
    5. Torvik, Ragnar, 2001. "Learning by doing and the Dutch disease," European Economic Review, Elsevier, vol. 45(2), pages 285-306, February.
    6. P J Forsyth & J A Kay, 1980. "The economic implications of North Sea Oil Revenues," Fiscal Studies, Institute for Fiscal Studies, vol. 1(3), pages 1-28, July.
    7. Mahbub Morshed, A. K. M. & Turnovsky, Stephen J., 2004. "Sectoral adjustment costs and real exchange rate dynamics in a two-sector dependent economy," Journal of International Economics, Elsevier, vol. 63(1), pages 147-177, May.
    8. Syrquin, M. & Chenery, H.B., 1989. "Patterns Of Development, 1950 To 1983," World Bank - Discussion Papers 41, World Bank.
    9. van Wijnbergen, Sweder J G, 1984. "The 'Dutch Disease': A Disease after All?," Economic Journal, Royal Economic Society, vol. 94(373), pages 41-55, March.
    10. Anne D. Boschini & Jan Pettersson & Jesper Roine, 2007. "Resource Curse or Not: A Question of Appropriability," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(3), pages 593-617, September.
    11. Flemming, John S, 1982. " Comment on J. P. Neary and D. D. Purvis, "Sectoral Shocks in a Dependent Economy: Long-run Adjustment and Short-run Accommodation."," Scandinavian Journal of Economics, Wiley Blackwell, vol. 84(2), pages 255-257.
    12. Krugman, Paul, 1987. "The narrow moving band, the Dutch disease, and the competitive consequences of Mrs. Thatcher : Notes on trade in the presence of dynamic scale economies," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 41-55, October.
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    14. Kareem Ismail, 2010. "The Structural Manifestation of the ‘Dutch Disease’; The Case of Oil Exporting Countries," IMF Working Papers 10/103, International Monetary Fund.
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    Cited by:

    1. Beine, Michel & Bos, Charles S. & Coulombe, Serge, 2012. "Does the Canadian economy suffer from Dutch disease?," Resource and Energy Economics, Elsevier, vol. 34(4), pages 468-492.
    2. Melina, Giovanni & Yang, Shu-Chun S. & Zanna, Luis-Felipe, 2016. "Debt sustainability, public investment, and natural resources in developing countries: The DIGNAR model," Economic Modelling, Elsevier, vol. 52(PB), pages 630-649.
    3. repec:spr:portec:v:17:y:2018:i:1:d:10.1007_s10258-017-0137-x is not listed on IDEAS
    4. Lacina Balma & Mthuli Ncube, 2015. "Macroeconomic Challenges of Structural Transformation; Public Investment, Growth and Debt Sustainability in Sierra Leone," IMF Working Papers 15/164, International Monetary Fund.
    5. Iacono, Roberto, 2014. "The Dutch Disease revisited: absorption constraint and learning by doing," MPRA Paper 59684, University Library of Munich, Germany.
    6. Araujo, Juliana D. & Li, Bin Grace & Poplawski-Ribeiro, Marcos & Zanna, Luis-Felipe, 2016. "Current account norms in natural resource rich and capital scarce economies," Journal of Development Economics, Elsevier, vol. 120(C), pages 144-156.
    7. Agenor, P.-R., 1997. "Capital-Market Imperfections and the Macroeconomic Dynamics of Small Indebted Economies," Princeton Studies in International Economics 82, International Economics Section, Departement of Economics Princeton University,.
    8. Mariam Camarero & Jesús Peiró-Palomino & Cecilio Tamarit, 2017. "External imbalances and growth," Working Papers 2017/02, Economics Department, Universitat Jaume I, Castellón (Spain).
    9. Lucas Bretschger & Simone Valente, 2011. "International economics and natural resources: from theory to policy," International Economics and Economic Policy, Springer, vol. 8(2), pages 115-120, June.

    More about this item

    Keywords

    Specific factors; Real exchange rate; Capital stock dynamics; Factor intensity; International trade; Dutch disease; Permanent income; Fiscal policy rules; Overlapping generations; JEL; E01; F43; O41; Q3;

    JEL classification:

    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General

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