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Testing the Dutch disease: the impact of natural resources extraction on the manufacturing sector

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  • Donny Harrison Pasaribu

Abstract

According to the Dutch disease theory, natural resource extractions can have an adverse effect on the manufacturing sector. However, the empirical evidence for the total effect of natural resources extraction on manufacturing has been inconclusive. Other factors such as backward and forward linkages and productivity spillover can also affect the manufacturing sector. This topic is important because many developing countries are still reliant on natural resources extraction while unable to develop their manufacturing sector. This study measures the total impact of natural resource rents on manufacturing value added in a cross-country setting. This is done using an instrumental variable method that utilises fluctuations in world resource prices, weighted by each country’s resource exports. The estimates use data from 149 countries over the period 1970-2014, covering the last two global resource booms (1970s oil boom and 2000s China-driven commodity boom). The study finds that increases in natural resource rent have a mild positive impact on manufacturing value added. The findings are then compared with the experience of resource-dependent Asia-Pacific countries such as Indonesia and Australia.

Suggested Citation

  • Donny Harrison Pasaribu, 2020. "Testing the Dutch disease: the impact of natural resources extraction on the manufacturing sector," Departmental Working Papers 2020-17, The Australian National University, Arndt-Corden Department of Economics.
    • Handle: RePEc:pas:papers:2020-17
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    File URL: https://acde.crawford.anu.edu.au/sites/default/files/publication/acde_crawford_anu_edu_au/2020-11/acde_td_pasaribu_2020_17.pdf
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    More about this item

    Keywords

    Dutch disease; natural resources; manufacturing;
    All these keywords.

    JEL classification:

    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • Q33 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Resource Booms (Dutch Disease)
    • 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
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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