The Dutch Disease in Kazakhstan: An Empirical Investigation

Balázs Égert and Carol Leonard ()

Focus on European Economic Integration, 2006, issue 2, 85-108

Abstract: In this paper we investigate whether or not the Dutch disease is at work in, or poses a threat to, the Kazakh economy. For this purpose, we first summarize the mechanism through which fluctuations in the price of oil could possibly damage the non-oil manufacturing industry and thus the long-term growth perspectives of an economy that relies heavily on oil production. Subsequently, we seek to analyze the specific chains of this transmission mechanism in Kazakhstan. The analysis of annual data for the period from 1998 to 2005 suggests that non-oil manufacturing has so far been spared the perverse effects of oil price increases. However, the real exchange rate of the open sector has appreciated during the last couple of years chiefly due to the appreciation of the nominal exchange rate. In a second step, we analyze to what extent this appreciation is linked to oil price developments and oil revenues. Our econometric estimations based on the monetary model of the exchange rate and a variety of real exchange rate models provide us with some indication that the rise in the price of oil and in oil revenues might be linked to an appreciation of the U.S. dollar exchange rate of the oil and non-oil sectors. However, the appreciation is mainly limited to the oil sector for the real effective exchange rate and seems to be statistically insignificant for the non-oil manufacturing sector.

Date: 2006
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