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

  • Rabah Arezki
  • Markus Brückner

This paper examines the effects 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 highly 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 consumption expenditures and political corruption. 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.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2011/wp-cesifo-2011-11/cesifo1_wp3656.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3656.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3656
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  16. José 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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  19. World Bank, 2010. "World Development Indicators 2010," World Bank Publications, The World Bank, number 4373.
  20. Svensson, Lars E O & Razin, Assaf, 1983. "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 97-125, February.
  21. Paul Cashin & C. McDermott, 2002. "Terms of Trade Shocks and the Current Account: Evidence from Five Industrial Countries," Open Economies Review, Springer, vol. 13(3), pages 219-235, July.
  22. Maurice Obstfeld and Kenneth Rogoff., 1994. "The Intertemporal Approach to the Current Account," Center for International and Development Economics Research (CIDER) Working Papers C94-044, University of California at Berkeley.
  23. Kaufmann, Daniel & Kraay, Aart & Mastruzzi, Massimo, 2009. "Governance matters VIII : aggregate and individual governance indicators 1996-2008," Policy Research Working Paper Series 4978, The World Bank.
  24. Lane, Philip R & Tornell, Aaron, 1996. "Power, Growth, and the Voracity Effect," Journal of Economic Growth, Springer, vol. 1(2), pages 213-41, June.
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  26. José Garcia Montalvo & Marta Reynal-Querol, 2004. "Ethnic polarization, potential conflict and civil wars," Economics Working Papers 770, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2005.
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