An Empirical Test of the Dutch Disease Hypothesis using a Gravity Model of Trade

Abstract

Although the core model of the Dutch Disease makes unambiguous predictions regarding the negative effect of a resource boom on a country’s manufacturing exports, the empirical literature that has followed has not clearly identified this effect. I attribute this to the failure of the existing literature to combine enough data to produce a sufficiently powerful and exogenous test. I will use the World Trade Database to systematically test this hypothesis in a gravity model of trade. World energy prices are used to bypass issues of endogeneity regarding primary exports. A one percent increase in world energy price is estimated to decrease a net energy exporter’s real manufacturing exports by almost half a percent. Similarly, after instrumentation, a one percent increase in an energy exporting country’s net energy exports is estimated decrease the country’s real manufacturing exports by 8 percent. The corresponding confidence intervals are tight and these results are shown to be quite robust.Dutch disease, resource booms, gravity model, manufacturing exports, energy, trade, industry.