Oil Boom, Manufacturing Sub-Sectors and Dutch Disease in Selected Oil-Rich Countries

Abstract

ABSTRACT:It is widely accepted that oil booms induce wealth effects that cause appreciation of the domestic currency, which harms the competitive manufacturing sector exports. This has been named the "Dutch disease" and has been examined in many studies; however, very limited attention has been paid to the impact of Dutch disease on manufacturing sub-sectors. This paper examines the impact of an oil boom on manufacturing sub-sectors in oil-rich developed and developing countries. It assesses the oil boom effect on medium-high technology exports in a panel data sample of 39 oil-rich countries for the period 1990–2015. It also investigates the effect of an oil boom on high-technology exports in a panel data sample of 31 oil-rich countries for the period 1990–2016. We employ the panel data fixed effect with Driscoll-Kraay standard errors approach to tackle several panel data problems that are normally present in such analyses: heteroscedasticity, serial correlation, and cross-sectional dependence. Using real oil revenue and oil production as a proxy for the oil boom, the results of the study show that an oil boom significantly reduces medium-high technology exports and high-technology exports at the global level of oil-rich developed and developing countries. These results confirm the presence of the resource movement effect of the Dutch disease, which hinders economic growth and development. When the full sample is split into regional groupings, these results are observed in Middle Eastern and African countries, Asian and Pacific countries, and European and North American countries, suggesting that these countries are also affected by the Dutch disease. However, Latin American countries produce opposite results. An oil boom significantly increases both medium-high- and high-technology exports, contradicting the Dutch disease argument. The results of this study suggest that policy makers in countries experiencing the Dutch disease problem should improve institutional quality, develop human capital, promote economic diversification, and enhance investment in manufacturing sub-sectors. They should also minimize the appreciation of the real exchange rate, attract FDI in the manufacturing sector, and reduce the cost of doing business. This will help them to utilize oil wealth more effectively and efficiently, enhancing economic growth and development, therefore avoiding the Dutch disease problem.