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Commodity Windfalls, Polarization, and Net Foreign Assets: Panel Data Evidence on the Voracity Effect

  • Rabah Arezki

    ()

    (International Monetary Fund (IMF))

  • Markus Bruckner

    ()

    (School of Economics, University of Adelaide)

This paper examines the effect that windfalls from international commodity price booms have on net foreign assets in a panel of 145 countries during the period 1970-2007. The main finding is that windfalls from international commodity price booms lead to a significant increase in net foreign assets, but only in countries that are ethnically homogeneous. In ethnically polarized countries, net foreign assets significantly decreased. To explain this asymmetry, the paper shows that in ethnically polarized countries commodity windfalls lead to large increases in government spending, political corruption, and the risk of expropriation, with no overall effect on GDP per capita growth. The paper's findings are consistent with theoretical models of the current account that have a built-in voracity effect.

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File URL: http://www.economics.adelaide.edu.au/research/papers/doc/wp2011-06.pdf
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Paper provided by University of Adelaide, School of Economics in its series School of Economics Working Papers with number 2011-06.

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Length: 24 pages
Date of creation: Jan 2011
Date of revision:
Handle: RePEc:adl:wpaper:2011-06
Contact details of provider: Postal: Adelaide SA 5005
Phone: (618) 8303 5540
Web page: http://www.economics.adelaide.edu.au/

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  11. Jos� G. Montalvo & Marta Reynal-Querol, 2005. "Ethnic Polarization, Potential Conflict, and Civil Wars," American Economic Review, American Economic Association, vol. 95(3), pages 796-816, June.
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  17. Tornell, Aaron & Lane, Philip R., 1998. "Are windfalls a curse?: A non-representative agent model of the current account," Journal of International Economics, Elsevier, vol. 44(1), pages 83-112, February.
  18. Carroll, Christopher D. & Jeanne, Olivier, 2009. "A tractable model of precautionary reserves, net foreign assets, or sovereign wealth funds," CFS Working Paper Series 2009/15, Center for Financial Studies (CFS).
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