۱- Introduction

۲- The Model

۳- Static Equilibrium

۴- Dynamic Equilibrium

۵- Dynamic Dutch Disease

۶- Empirical Implications and Results

۷- Conclusion

References

Abstract

In this paper we develop the first model to incorporate the dynamic productivity consequences of both the spending effect and the resource movement effect of oil abundance. We show that doing so dramatically alters the conclusions drawn from earlier models of learning by doing (LBD) and the Dutch disease. In particular, the resource movement effect suggests that the growth effects of natural resources are likely to be positive, turning previous growth results in the literature relying on the spending effect on their head. We motivate the relevance of our approach by the example of a major oil producer, Norway. Empirically we find that the effects of an increase in the price of oil may resemble results found in the earlier Dutch disease literature, while the effects of increased oil activity increases productivity in most industries. Therefore, models that only focus on windfall gains due to increased spending potential from higher oil prices, would conclude – incorrectly based on our analysis – that the resource sector cannot be an engine of growth.

Introduction

In 1969 Norway discovered off-shore oil in the North Sea. Since then, the oil sector has been one of the key drivers of growth, crowding in many oil related industries that, over time, have developed advanced knowledge on how to operate in deep waters under harsh climate conditions, see e.g. Bjørnland and Thorsrud (2016). Likewise, the recent North American shale revolution has turned the United States in the space of only a few years into the world largest oil producer. Technological developments in drilling and fracking since the turn of this century have unlocked the huge reserves that lie trapped in shale rock. The oil boom seems to have benefited local industries in the U.S., and there has been no crowding out of the manufacturing sector so far, see e.g. Allcott and Keniston (2018) for some recent empirical evidence. In contrast, in countries such as Angola and Venezuela, decades of oil abundance have led to lower productivity and income levels, see e.g. Mehlum et al. (2006). In this paper we aim to understand why, contrary to the traditional models of the Dutch disease, the effects of oil in countries such as Norway, and more recently the U.S., have been so favorable. We argue that incorporating the dynamic productivity consequences of petroleum related industries is key to understand this, and that existing theories of the Dutch disease have to be extended, as we discuss in the following. One of the most influential explanations of the Dutch disease is that of the Learning By Doing (LBD) models of van Wijnbergen (1984a), Krugman (1987) and Sachs and Warner (1995). According to these approaches, a country that discovers oil is essentially in receipt of a foreign exchange gift. The gift increases income, and with traded and non-traded goods both being normal goods, the increase in demand pushes workers out of the traded sector and into the non-traded sector; the increased demand for traded goods can be satisfied by using the foreign exchange gift, while the increased demand for nontraded goods can only be satisfied by having a larger share of the labour force producing non-traded goods. This structural transformation of the economy, however, means that labour is transferred from strong to weak LBD sectors. Economic growth is pushed down. While these theoretical approaches can explain the negative economic developments observed in countries such as Angola and Venezuela, they fail to describe what is going on in oil producing countries such as Norway. This can be illustrated by comparing the economic development of Norway with that of its neighbor Sweden, a major oil importer.