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An Empirical Growth Model for Major Oil Exporters

  • Esfahani, H. S.
  • Mohaddes, K.
  • Pesaran, M. H.

This paper develops a long-run growth model for a major oil exporting economy and derives conditions under which oil revenues are likely to have a lasting impact. This approach contrasts with the standard literature on the "Dutch disease" and the "resource curse", which primarily focuses on short-run implications of a temporary resource discovery. Under certain regularity conditions and assuming a Cobb-Douglas production function, it is shown that (log) oil exports enter the long-run output equation with a coefficient equal to the share of capital ( ). The long-run theory is tested using quarterly data on nine major oil economies, six of which are current members of OPEC (Iran, Kuwait, Libya, Nigeria, Saudi Arabia, and Venezuela), plus Indonesia which is a former member, and Mexico and Norway, which are members of the OECD. Overall, the test results support the long-run theory. The existence of long-run relations between real output, foreign output and real oil income is established for six of the nine economies considered. The exceptions, Mexico and Norway, do not possess sufficient oil reserves for oil income to have lasting impacts on their economies. At their current production rates, the proven oil reserves of Mexico and Norway are expected to last 9 and 10 years respectively, as compared to reserve-production ratios of OPEC members, which lie in the range of 45 to 125 years. For Indonesia, whose share of oil income in GDP has been declining steadily over the past three decades, the theory suggests that the effect of oil income on the economy's steady state growth rate will vanish eventually, and this is indeed confirmed by the results. Sensible estimates of a are also obtained across the six economies with long-run output equations, and impulse responses are provided for the effects of shocks to oil income and foreign output in these economies.

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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1215.

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Date of creation: 21 Mar 2012
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Handle: RePEc:cam:camdae:1215
Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

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  1. Garratt, Anthony & Lee, Kevin & Pesaran, M. Hashem & Shin, Yongcheol, 2006. "Global and National Macroeconometric Modelling: A Long-Run Structural Approach," OUP Catalogue, Oxford University Press, number 9780199296859, March.
  2. Filippo di Mauro & L. Vanessa Smith & Stephane Dees & M. Hashem Pesaran, 2007. "Exploring the international linkages of the euro area: a global VAR analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(1), pages 1-38.
  3. Cavalcanti, T.V.V. & Mohaddes, K. & Raissi, M., 2009. "Growth, Development and Natural Resources: New Evidence Using a Heterogeneous Panel Analysis," Cambridge Working Papers in Economics 0946, Faculty of Economics, University of Cambridge.
  4. Pesaran, M.H. & Shin, Y., 1993. "Cointegration and Speed of Convergence to Equilibrium," Cambridge Working Papers in Economics 9311, Faculty of Economics, University of Cambridge.
  5. Francesco Caselli & Tom Cunningham, 2009. "Leader behaviour and the natural resource curse," Oxford Economic Papers, Oxford University Press, vol. 61(4), pages 628-650, October.
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  8. Pesaran, M. H. & Shin, Y. & Smith, R. J., 1997. "Structural Analysis of Vector Error Correction Models with Exogenous I(1) Variables," Cambridge Working Papers in Economics 9706, Faculty of Economics, University of Cambridge.
  9. Anthony Garratt & Kevin Lee & M. Hashem Pesaran & Yongcheol Shin, 2003. "A Long run structural macroeconometric model of the UK," Economic Journal, Royal Economic Society, vol. 113(487), pages 412-455, 04.
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  11. Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 681-712, August.
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  13. Gredenhoff, Mikael & Jacobson, Tor, 2001. "Bootstrap Testing Linear Restrictions on Cointegrating Vectors," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(1), pages 63-72, January.
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  15. Carlos Leite & Jens Weidmann, 1999. "Does Mother Nature Corrupt; Natural Resources, Corruption, and Economic Growth," IMF Working Papers 99/85, International Monetary Fund.
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  17. Peter Pedroni, 2004. "Social Capital, Barriers to Production, and Capital Shares: Implications for the Importance of Parameter Heterogeneity from a Nonstationary Panel Approach," Department of Economics Working Papers 2004-03, Department of Economics, Williams College.
  18. Tiago de. V. Cavalcanti & Kamiar Mohaddes & Mehdi Raissi, 2011. "Does oil abundance harm growth?," Applied Economics Letters, Taylor & Francis Journals, vol. 18(12), pages 1181-1184.
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