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Good Mine, Bad Mine: Natural Resource Heterogeneity and Dutch Disease in Indonesia

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  • Paul Pelzl
  • Steven Poelhekke

Abstract

We analyse the local effect of exogenous shocks to the value of mineral deposits at the district level in Indonesia using a panel of manufacturing plants. To the best of our knowledge, we are the first to model and estimate the effect of heterogeneity in natural resource extraction methods. We find that in areas where mineral extraction is relatively capital-intensive, mining booms cause virtually no upward pressure on manufacturing earnings per worker, and both producers of traded and local goods benefit from mining booms in terms of employment. In contrast, labour-intensive mining booms drive up local manufacturing wages such that producers of traded goods reduce employment. This source of heterogeneity helps to explain the mixed evidence for `Dutch disease' effects in the literature. In addition, we find no evidence that fiscal revenue sharing between sub-national districts leads to any spillovers.

Suggested Citation

  • Paul Pelzl & Steven Poelhekke, 2018. "Good Mine, Bad Mine: Natural Resource Heterogeneity and Dutch Disease in Indonesia," CESifo Working Paper Series 7284, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_7284
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    Keywords

    dutch disease; natural resources; mining; labour intensity; Indonesia;

    JEL classification:

    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • L72 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Other Nonrenewable Resources
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General

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