An alternative explanation for the resource curse: the income effect channel

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Abstract:

This article 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 nonresource 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 nonhydrocarbon sector growth regressions using a panel of 25 oil-exporting countries over the period 1992 to 2005.

Keywords: C1; C82; O11; O41; Q30; fiscal policy; investment and growth; resource curse

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036846.2011.568400

Affiliations: Asia and Pacific Department, International Monetary Fund, 700, 19th Street N.W.WashingtonDC 20431, USA

Publication date: August 1, 2012

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