RESOURCE BOOMS CAN BENEFIT THE WIDER ECONOMY: Evidence from mineral-abundant Australia and oil-rich Norway

A natural resource boom in a country can have positive effects on non-resource industries, according to research by Hilde C. Bjørnland and Leif Anders Thorsrud, published in the December 2016 issue of the Economic Journal.

Their analysis of Australia and Norway indicates that the wider benefits for the economy are particularly evident when taking account of productivity ''spillovers'' and ''learning-by-doing'' between industries. The most positively affected sectors from a resource boom are construction and business services. Yet, manufacturing also benefits, though less so than the other industries.

Do resource booms enhance growth in a country or lead to a ''crowding out'' of other tradable industries, such as manufacturing? Traditional theories suggest that crowding-out effects dominate. The idea is that gains from the boom largely accrue to the profitable sectors servicing the resource industry, while the rest of the country suffers adverse effects from increased wage costs, an appreciated exchange rate and a lack of competitiveness as a result of the boom.

In the research literature, such a phenomenon is commonly been referred to as ''Dutch disease'', based on similar experiences in the Netherlands in the 1960s. But traditional studies of Dutch disease do not account for productivity spillovers between the booming resource sector and other non-resource sectors.

The new study puts forward a simple theory model that allows for such spillovers. The researchers then quantify these spillovers empirically using a dynamic factor model, allowing for measurement of both resource and spending effects through a large panel of variables.

Using mineral-abundant Australia and petroleum-rich Norway as representative cases studies, the researchers find that a booming resource sector has substantial productivity spillovers on non-resource sectors, effects that have not been captured in previous analysis.

In particular, they find that the resource sector stimulates productivity in both Australia and Norway. Value added and employment also increase, although more so in the non-traded than in the traded sectors, suggesting a two-speed transmission phase.

Augmenting traditional Dutch disease theories

Experience in resource-rich countries suggests that there may be important spillovers from the resource sectors to other industries. Norway is good example. As the development of offshore oil often demands complicated technical solutions, this could in itself generate positive knowledge externalities that benefit other sectors. And since these sectors trade with other industries in the economy, there may be learning by doing spillovers to the overall economy.

Traditional Dutch disease theories do not account for such spillovers. The model developed in this study does take account of them. The authors allow for direct productivity spillovers from the resource sector to both the traded and non-traded sector.

They further assume that there is learning-by-doing in the traded and non-traded sectors, as well as learning spillovers between these sectors. Hence, they extend the more traditional model of learning-by-doing with technology spillovers from the resource sector. To the extent that the natural resource sector crowds in productivity in the other sectors, the growth rate in the overall economy will also increase.

The positive effects of a resource boom

The researchers test the predictions from their suggested theoretical model against data by estimating a dynamic factor model that includes separate activity factors for the resource and non-resource sectors in addition to global activity and the real commodity price.

This makes it possible to examine separately the windfall gains associated with resource booms (that is, volume changes) from commodity price changes, while also allowing global demand to affect commodity prices.

The main finding emphasises that there are large and positive spillovers from the exploration of natural resources to the non-resource industries in both Norway and Australia. In particular, in the wake of the resource boom, productivity, output and employment increase for a prolonged period of time in both countries.

The expansion in Norway is substantial; after one to two years, 25-30% of the variation in non-resource GDP is explained by the resource boom, while the comparable numbers are 43-50% for productivity. In Australia, the expansion is more modest: 10-15% of value added in non-mining is explained by the resource boom, while 5-6% of productivity is explained by the same shock.

Examining the different industries, the researchers confirm that value added and employment increase in the non-traded sectors relative to the traded sectors, suggesting a two-speed transmission phase. The most positively affected sectors are construction and business services. Still, and in contrast to the predictions from the traditional Dutch disease theories, manufacturing also benefits from the resource boom, although less so than the other industries – see Figure 1.

''Boom or Gloom? Examining the Dutch Disease in Two-speed Economies'' by Hilde C. Bjørnland and Leif Anders Thorsrud is published in the December 2016 issue of the Economic Journal. The authors are at the Centre for Applied Macro and Petroleum economics, BI Norwegian Business School.