An Alternative Explanation for the Resource Curse: The Income Effect Channel

Ali Alichi and Rabah Arezki

No 2009/112, IMF Working Papers from International Monetary Fund

Abstract: The paper provides an alternative explanation for the "resource curse" based on the income effect resulting from high government current spending in resource rich economies. Using a simple life cycle framework, we show that private investment in the non-resource sector is adversely affected if private agents expect extra government current spending financed through resource sector revenues in the future. This income channel of the resource curse is stronger for countries with lower degrees of openness and forward altruism. We empirically validate these findings by estimating non-hydrocarbon sector growth regressions using a panel of 25 oil-exporting countries over 1992-2005.

Keywords: WP; income effect; resource curse; fiscal policy; investment and growth; income effect channel; NH-GDP growth; estimation result; open economy; price effect; equals 0.29; income effect explanation; resource sector of the economy; natural resource revenue; estimation coefficient; sector GDP growth; goods movement; Income; Current spending; Capital flows; Natural resources (search for similar items in EconPapers)
Pages: 24
Date: 2009-05-01
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Citations: View citations in EconPapers (2)

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Journal Article: An alternative explanation for the resource curse: the income effect channel (2012)
Working Paper: An Alternative Explanation for the Resource Curse: The Income Effect Channel (2009)
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