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An Alternative Explanation for the Resource Curse; The Income Effect Channel

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  • Ali Alichi
  • Rabah Arezki

Abstract

The paper provides an alternative explanation for the "resource curse" based on the income effect resulting from high government current spending in resource rich economies. Using a simple life cycle framework, we show that private investment in the non-resource sector is adversely affected if private agents expect extra government current spending financed through resource sector revenues in the future. This income channel of the resource curse is stronger for countries with lower degrees of openness and forward altruism. We empirically validate these findings by estimating non-hydrocarbon sector growth regressions using a panel of 25 oil-exporting countries over 1992-2005.

Suggested Citation

  • Ali Alichi & Rabah Arezki, 2009. "An Alternative Explanation for the Resource Curse; The Income Effect Channel," IMF Working Papers 09/112, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:09/112
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    References listed on IDEAS

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    1. International Monetary Fund, 1999. "Macroeconomic and Sectoral Effects of Terms-of-Trade Shocks; The Experience of the Oil-Exporting Developing Countries," IMF Working Papers 99/134, International Monetary Fund.
    2. Xavier Sala-i-Martin & Arvind Subramanian, 2013. "Addressing the Natural Resource Curse: An Illustration from Nigeria," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 22(4), pages 570-615, August.
    3. Dani Rodrik & Arvind Subramanian & Francesco Trebbi, 2004. "Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development," Journal of Economic Growth, Springer, vol. 9(2), pages 131-165, June.
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    5. Kamilya Tazhibayeva & Aasim M. Husain & Anna Ter-Martirosyan, 2008. "Fiscal Policy and Economic Cycles in Oil-Exporting Countries," IMF Working Papers 08/253, International Monetary Fund.
    6. Mohsin S. Khan, 1996. "Government Investment and Economic Growth in the Developing World," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 35(4), pages 419-439.
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    13. Philip R. Lane & Aaron Tornell, 1999. "The Voracity Effect," American Economic Review, American Economic Association, vol. 89(1), pages 22-46, March.
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    1. repec:eee:jjieco:v:47:y:2018:i:c:p:32-54 is not listed on IDEAS
    2. Flory Dieck-Assad & Ernesto Peralta, 2013. "Energy and capital inputs: cornerstones of productivity growth in Mexico: 1965–2004," Empirical Economics, Springer, vol. 44(2), pages 563-590, April.

    More about this item

    Keywords

    Capital accumulation; Capital flows; Domestic investment; Economic growth; Cross country analysis; Economic models; Fiscal policy; Revenue sources; Private sector; Government expenditures; Income; Natural resources; resource curse; investment and growth; capital movements; exporting countries; closed economy; foreign capital;

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General

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