south east asia development 4 pptx

1: nominal exch rate appreciation fewer Rp per $  real appreciation, or a rise in RER... Summary: the story so far The ‘boom’ in one tradable sector say, oil has supply and demand sid

4: Global shocks: oil prices

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 Global shocks and responses

Oil price

World economic growth

Real interest rates

 Indonesia’s “other” D.D.

 Philippine currency crisis

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The resource wealth paradox

 “Since the second world war it has become quite clear

that rapid economic growth is available to those countries with adequate natural resources which make the effort to achieve it.”

 W.A Lewis 1968, Some Aspects of Economic Development: ix

 “Incentives to create wealth sometimes get blunted by the ability to extract wealth from the soil or the sea Rich

parents sometimes spoil their kids; Mother Nature is no

exception.”

 J Sachs and A Warner 2001: “The curse of natural

resources”, Eur Econ Rev.

 “You can’t build ships by selling fish”

 B.J Habibie, Indonesian minister for science & technology (1997)

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The resource curse hypothesis

Sachs and Warner: countries with abundant natural

resource wealth grow more slowly

fast

education)

 Returns to human capital investments are likely to be low

 E.g Thailand’s low secondary enrollment rates

efficiency

Puzzle: why are major SE Asian countries exceptions to the Sachs-Warner story?

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Reasons for the SE Asian difference?

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Model: resource exports and Dutch Disease

Assume traded goods enter domestic market at (given) world price

 Global demand (exports) or supply (imports) infinitely elastic

Non-traded goods: domestic market clears; price is endogenous

 T = Traditional exports and import-competing sectors

 N = non-traded services; demand is highly income-elastic

 Labor is mobile among all sectors

= p N /Ep T* , where p T* are world prices (in $) and E = Rp/$

Ex 1: nominal exch rate appreciation (fewer Rp per $)  real

appreciation, or a rise in RER

Ex 2: Rise in p N also  real appreciation

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Traded goods

Nontraded (services)

RER A

• All traded goods aggregated on vertical axis

• All non-traded goods on horizontal axis

• Cannot trade N goods, so eq’m at A: production =

consumption

u(T, N)

• Resource boom moves PPF out in direction of T only

RER1C

N1 N0

T1

T0

• The boom generates new income for consumers

• Assume demand for N is income-elastic (grows along inc exp path)

Summary: the story so far

 The ‘boom’ in one tradable sector (say, oil) has supply and demand side effects on the rest of the economy

 Supply side: resources (e.g labor) pulled in from other sectors, incl non-tradables

 To sustain N production equal to demand, their price must rise

 Demand side: boom creates new income, and some (all) is spent back into economy

 Spending on N raises their price

 Two sources of real exchange rate appreciation

 What do these price changes, and associated reallocation of

productive resources, mean for the rest of the economy?

 Implications for growth, econ structure, income dist?

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w2

? What happens to M sector employment (and thus output)?

a c

d

Resource boom and Dutch disease

 In an economy producing resources, manufactures and services,

a ‘boom’ (discovery of new resources):

 Raises output of resource sector and reduces output of both other sectors through competition for labor, which raises

wages …

… and leads to excess demand for services, which produces a real appreciation …

… which diminishes output gain in resources sector and

further reduces jobs and output in manufacturing

 The spending of new income created by the boom:

 Raises demand for all goods, including services, which leads

to a further real appreciation and wage rise …

… which once again reduces jobs and output in

manufacturing

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More on resource booms

 Sector described as ‘manufacturing’ could

instead be traded agriculture (hence

‘deagriculturalization’), or both

 Technical progress such as green revolution can also be a source of a ‘boom’

 ‘Enclave’ sectors (e.g oil) may have little or no

factor market impact but income (spending)

effect may be very large

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The OPEC oil price booms

 OPEC oil price rises (1973 and 1978-80)

raised Indonesia’s terms of trade with rest of

world.

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The OPEC oil price booms

 Big income effects:

 Indon GDP up by ~15% in OPEC I, and ~20% in OPEC II

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Indonesia’s “other” Dutch disease

 Big real exchange rate effects (domestic inflation):

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Indonesia’s “other” Dutch disease

Big structural change effects… but a puzzle too

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* Why did manufacturing output not decline as predicted?

How Indonesia avoided Dutch disease

• Increased protection for industry

appreciation: 1978, 1983, 1986

• Support for other tradable sectors, especially

agriculture:

– Infrastructure investments irrigation, roads, market facilities

– Capital market investments rural credit

– Human capital investments in rural areas (health & nutrition, education)

– Agricultural R&D investments new rice research

– Land colonization (transmigration programs) to maintain labor

Indonesia: Central government expenditures

1970197119721973197419751976197719781979198019811982198319841985Source: Woo et al Table A12

(Development exp as % of total exp, total exp in $US

Percent

0.00 5.00 10.00 15.00 20.00 25.00

Total exp ($US bn) Development exp

Total exp (US Bn)

Other agr & irrigation exp Fertilizer subsidy

Policy implications of Dutch disease

structure should not present a policy dilemma

 If structural change is costly (transactions costs)

 If some sectors or industries suffer irreversible changes (e.g go

out of existence)

 If industry sectors exhibit positive externalities, e.g from

increasing returns to scale, or learning by doing, or inter-industry productivity spillovers

saving them as foreign assets rather than spending them in domestic economy

 But political costs of this strategy

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Other examples of Dutch Disease in SE Asia

 Your thoughts?

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