Working Paper: CEPR ID: DP1668
Authors: Thorvaldur Gylfason; Tryggvi Thor Herbertsson; Gylfi Zoega
Abstract: This paper diagnoses the symptoms of the Dutch disease in a two-sector stochastic endogenous growth model. A productive, low skill-intensive primary sector causes the currency to appreciate in real terms, thus hampering the development of a high skill-intensive secondary sector and thereby reducing growth. Moreover, the volatility of the primary sector generates real exchange rate uncertainty, and may thus reduce investment and learning in the secondary sector and hence also growth. Cross-section and panel regressions based on data for 125 countries in the period 1960?92 confirm a statistically significant inverse relationship between the size of the primary sector and economic growth, but not between the volatility of the real exchange rate and growth.
Keywords: Endogenous Growth; Natural Resources; Dutch Disease; Learning-by-Doing
JEL Codes: O41; O32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Primary sector size (L25) | Economic growth (O49) |
| Primary sector productivity (E23) | Currency appreciation (F31) |
| Currency appreciation (F31) | Development of high-skill secondary sector (J24) |
| Primary sector size (L25) | Investment in human capital (J24) |
| Primary sector size (L25) | Significance of education variables (I24) |
| Volatility of real exchange rate (F31) | Economic growth (O49) |
| Foreign indebtedness (F34) | Economic growth (O49) |