The impact of natural resource abundance on economic performance from a technology intensity perspective

The association between natural resource abundance and economic performance has been the common concern of economists and political philosophers for centuries. While some economists believe that plenty of resources is a blessing for the countries, others object to that view arguing that resource abundant countries often fall behind resource poor ones. The experiences of resource rich countries have been very heterogeneous. There exists a vast theoretical and empirical literature on the relationship between the natural resource abundance and economic performance. The findings of these studies suggest that the interaction between the two variables is not bulletproof. While some countries experience a miracle of plenty and enjoy an increase in their living standards, others are exposed to the paradox of plenty known as Dutch Disease. Dutch disease is a paradoxical situation in which the growth of one sector crowds out the production of another sector. Manufacturing production declines because of the boom in natural resources sector and the consequent expansion of the public and services sectors. As a result, the overall growth rate of the country shrinks and the boom turns out to be a bust. The aim of this study is to investigate the influence of natural resource discoveries as well as booms on manufacturing sector of the 34 Organisation for Economic Co-Operation and Development (OECD) countries between the years 1991-2013, depending on the technology intensity of sectors. We employ theoretical gravity model of trade with fixed effects where we proxy manufacturing production (dependent variable) by exports, since countries export goods in which they have comparative advantage. We proxy booms in natural resources production (our key independent variable) by growth rate in contribution of all natural resources income to gross domestic product (GDP) in a country (total resources rents). Trade data are gathered from the OECD Structural Analysis Statistics (Stan) Database and classified according to the International Standard Industrial Classification of All Economic Activities (ISIC) technology intensity definition. We form the rest of the gravity model in accordance with the contemporary gravity literature. Employing the augmented gravity model of trade, the relationship between technology intensity and the Dutch Disease is investigated. The findings of the study reveal no evidence of Dutch Disease in any of the industrial classifications. In other words, for the 34 OECD countries there is no relation between the increase in natural resource rents and the manufacturing sector's performance in any subcategory of the sector. Keywords: Natural resource abundance, economic performance, Dutch disease, gravity model, technology intensity.