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Dutch Disease Resistance: Evidence from Indonesian Firms

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  • James Cust
  • Torfinn Harding
  • Pierre-Louis Vezina

Abstract

Oil and gas extraction may lead to the Dutch disease, i.e. the crowding ot of the manufacturing sector due to rising wages when labor is drawn to the expanding extraction and services sectors. In this paper we exploit the fact that oil and gas discoveries contain an element of chance as well as oil price fluctuations to capture random variation in oil and gas windfalls across Indonesia and identify their effects on manufacturing firms. We find that oil and gas windfalls cause wage growth but that the firm exit rate is unaffected. Firms’ output and labor productivity increase along with wages suggesting where firms are able to respond to booming local demand, and raise productivity in response to upward wage pressures, they can overcome the crowding-out effects from resource windfalls.

Suggested Citation

  • James Cust & Torfinn Harding & Pierre-Louis Vezina, 2017. "Dutch Disease Resistance: Evidence from Indonesian Firms," OxCarre Working Papers 192, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  • Handle: RePEc:oxf:oxcrwp:192
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    Cited by:

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    2. Pelzl, Paul & Poelhekke, Steven, 2021. "Good mine, bad mine: Natural resource heterogeneity and Dutch disease in Indonesia," Journal of International Economics, Elsevier, vol. 131(C).
    3. Aloysius Gunadi Brata & Henri L. F. De Groot & Wouter Zant, 2018. "Shaking up the Firm Survival: Evidence from Yogyakarta (Indonesia)," Economies, MDPI, Open Access Journal, vol. 6(2), pages 1-14, April.
    4. Zuo, Na & Zhong, Hua, 2020. "Can resource policy reverse the resource curse? Evidence from China," Resources Policy, Elsevier, vol. 68(C).

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    More about this item

    Keywords

    Dutch disease; firm level; Indonesia; manufacturing firms; oil and gas;
    All these keywords.

    JEL classification:

    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development

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