Oil and the Dutch disease: New panel data evidence from developing countries

Abstract

This paper applies the panel data fixed effect with Driscoll and Kraay standard errors and Cross-Sectional Augmented Autoregressive Distributive Lag (CS-ARDL) approaches to examine the Dutch disease phenomenon–one of the key underpinnings of the resource curse, in selected oil-rich developing countries. It also assesses the Dutch disease problem via both the spending and resource movement effects, in addition to assessing evidence of the problem in the manufacturing sub-sectors, all of which have been neglected in recent studies. Furthermore, we examine the role of the exchange rate in the oil boom and non-oil sectors nexus. Thus, the approach taken in the paper contributes significantly and in more holistic way to our understanding of the Dutch disease problem. Using panel data fixed effect, our results suggest that there is strong evidence of the spending and resource movement effects, leading to an appreciation of the real exchange rate, and reduction in the outputs and exports of large parts of the non-oil tradable sectors in the developing world. Our results also show that appreciation of the real exchange rate resulting from the oil boom worsens the negative effect of the oil boom on non-oil sectors, further evidence of the Dutch disease and resource curse. Our results are sensitive to different sectoral output measurements, particularly after employing the CS-ARDL approach. The policy implications of our results for these countries are also discussed.