An Alternative Explanation for the Resource Curse: The Income Effect Channel
May 1, 2009
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Summary
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.
Subject: Balance of payments, Capital flows, Current spending, Environment, Expenditure, Income, National accounts, Natural resources
Keywords: Capital flows, Current spending, equals 0.29, estimation coefficient, estimation result, fiscal policy, goods movement, Income, income effect, income effect channel, income effect explanation, investment and growth, natural resource revenue, Natural resources, NH-GDP growth, open economy, price effect, resource curse, resource sector of the economy, sector GDP growth, WP
Pages:
24
Volume:
2009
DOI:
Issue:
112
Series:
Working Paper No. 2009/112
Stock No:
WPIEA2009112
ISBN:
9781451872590
ISSN:
1018-5941
