Macroeconomic Impact of Mineral Revenues on General Market Equilibrium and Poverty Alleviation in Sub-Saharan Africa

A combination of higher oil production as well as higher oil prices is creating oil revenue windfalls for some Sub Saharan African countries. If well managed, these revenues have the potential to reduce poverty and bridge the development gap; if not they could lead to Dutch disease and an increase in income inequality. Our research examines the potential impact of government expenditure on the nontraded sector and its implications on production and wages in other sectors. Not surprisingly our results show that government’s nontraded expenditure leads to a reduction in output of other sectors and a decrease in the wages of these sectors leading to Dutch disease and income disparity. A tariff applied to protect a leading part of the traded sector could in the short term reduce the negative impact and help raise wages in the protectable sector. However, in the medium term, once learning by doing is introduced, the potential benefit of the tariff was minimized. When these oil windfalls diminish in the long term the tariff has a definite negative impact on the protectable sector. We conclude that some Sub Saharan African countries could consider applying a tariff in the short term to reduce the impact of the nontraded expenditure on the traded sector of the economy. This tariff is not recommended for medium or long term and it should be associated with infrastructure investments to support the country’s comparative advantages.