DUTCH DISEASE IN SELECTED OIL EXPORTING COUNTRIES

Abstract

The current thesis aims to test the Dutch Disease hypothesis on a set of oil-exporting countries through the competitiveness channel (spending effect), in addition to examining the effect of other factors on the phenomenon, which are the size of the country, the length of time exporting oil, development stages, and exchange rate regimes. By using the Dynamic Panel Threshold Model of Kremer et al. (2013), the dependent variable is non-oil exports as a percentage of GDP, while real effective exchange rate (REER) was set as the threshold variable, the other explanatory variables are foreign income and the dummy variable of the exchange rate regimes, which is substituted with the dummy variable of developed countries when the exchange rate regimes are examined. The sample of the study included 53 net-oil exporters and covers the period 2001–2010. The study deduced that the Dutch Disease (DD) hypothesis is valid and all net oil-exporting countries are exposed to this effect. During the ten years from 2001–2010, these countries lost 2.88% of non-oil exports due to deterioration in their competitiveness in the world market, and this is when REER increased to more than 3%. The Influence of REER is very sensitive, where non-oil exports decreased dramatically with minimal appreciation compared to the normal case. By contrast, when real effective exchange rate (REER) fell below a 3% increase, the shrinking of non-oil exports was reduced from 2.8% to 0.6%. Therefore, policymakers are advised to monitor and adjust the REER appreciation to less than 3%. Furthermore, the DD effect (DDE) is not related to the size of a country. This condition means that DD is not an inevitable consequence, to the extent that increasing revenue in small countries would not intensify the DDE. Therefore, other factors could be more important, such as the quality of institutions. However, the effect of time was revealed to iv be important in the DD consequences. This condition means that a more recent period of oil exporting had a higher influence on diminishing non-oil exports, while the adjustment process takes its course and the country suffers from productivity constraints. Additionally, the structure of development played a significant role in shaping the DDE, where the least developed countries (LDCs) were positively affected because of the benefits arising from productive capacity and low price level. In the case of developing economies, non-oil exports were increasingly affected, where the weakness of these institutions is the most prominent characteristic of these countries. In contrast, in developed economies, the effect is recognized as the production capacity and the quality of institutions are at their best. Considering the adopted exchange rate regimes, it was revealed that the DDE had a more intense effect with fixed regimes and was mitigated with floating and intermediate regimes. Finally, we recommend that country development be improved and the benefits of adopting a floating regime be capitalised on. Otherwise, it is advisable to use the real exchange rate policy.