The Resource Curse: Does Fiscal Policy make a Difference?
with Mario Giarda
We explore empiricallly the relationship between commodity prices, fiscal policy, and income per capita. First we construct time-varying indicators of fiscal cyclicality for 75 countries since 1970. Then we estimate panel data cointegrating vectors between income per capita, an index of commodity prices, and an interaction between commodity prices and our fiscal cyclicality indicators. We do this for different groups of commodities and different group of countries. The results confirm the existence of a resource curse, which is contingent on the quality of institutions and varies with the type of commodities. The new findings are related to fiscal policy. In countries where this is conducted in a procyclical way the long-run effect of an increase in commodity prices is more negative, even controlling for institutional quality. These effects are particularly important in the case of minerals, precisely where the resource curse is more intense. We also show that the systematic response of fiscal spending to changes in commodity prices beyond the cyclical stance of the economy is also relevant explaining the resource curse. Unlike the measure of cyclicality with respect to output, in this case the sign of the effect is not homogeneous. Indeed positive responses of spending to changes in the price of minerals seem to have a positive effect on long run income per capita. All of these results are driven by the time variation in fiscal policy and hence may be explained by institutional improvements not captured by the usual measures of institutional quality, or by an independent effect of fiscal policy.
with Mario Giarda
We explore empiricallly the relationship between commodity prices, fiscal policy, and income per capita. First we construct time-varying indicators of fiscal cyclicality for 75 countries since 1970. Then we estimate panel data cointegrating vectors between income per capita, an index of commodity prices, and an interaction between commodity prices and our fiscal cyclicality indicators. We do this for different groups of commodities and different group of countries. The results confirm the existence of a resource curse, which is contingent on the quality of institutions and varies with the type of commodities. The new findings are related to fiscal policy. In countries where this is conducted in a procyclical way the long-run effect of an increase in commodity prices is more negative, even controlling for institutional quality. These effects are particularly important in the case of minerals, precisely where the resource curse is more intense. We also show that the systematic response of fiscal spending to changes in commodity prices beyond the cyclical stance of the economy is also relevant explaining the resource curse. Unlike the measure of cyclicality with respect to output, in this case the sign of the effect is not homogeneous. Indeed positive responses of spending to changes in the price of minerals seem to have a positive effect on long run income per capita. All of these results are driven by the time variation in fiscal policy and hence may be explained by institutional improvements not captured by the usual measures of institutional quality, or by an independent effect of fiscal policy.