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

Author/Editor:

Ali Alichi ; Rabah Arezki

Publication Date:

May 1, 2009

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Series:

Working Paper No. 2009/112

Subject:

Balance of payments Capital flows Current spending Environment Expenditure Income National accounts Natural resources

English

Publication Date:

May 1, 2009

ISBN/ISSN:

9781451872590/1018-5941

Stock No:

WPIEA2009112

Pages:

24

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