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

Author name: 
Donny Harrison Pasaribu

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.

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