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An Empirical Analysis of a Regional Dutch Disease: The Case of Canada

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Abstract

While there has been extensive research on the Dutch Disease (DD), very little attention, if any, has been devoted to the regional mechanisms through which it may manifest itself. This is the first empirical attempt to research a ‘regional DD’ by looking at the local and spatial impacts of resource windfalls across Canadian provinces and territories. We construct a new panel dataset to examine separately the key DD channels; namely, the Spending Effect and the Resource Movement Effect. Our analysis reveals that the standard DD mechanisms are also relevant at the regional level; specifically, we find that: (a) Resource windfalls are associated with higher inflation and a labour (capital) shift from (to) non-primary tradable sectors. (b) Resource windfalls in neighbouring regions are associated with a capital (labour) shift from (to) non-primary tradable sectors in the source region. (c) The (spatial) DD explains (51  %) 20  % of the adverse effects of resource windfalls (in neighbouring regions) on region-specific non-mineral international exports (in the source region), and does not significantly affect domestic ones.

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Notes

  1. By ‘source region’ we mean the region inspected when considering resource booms in neighbouring regions, under the spatial context. This definition holds throughout the paper.

  2. For instance, in our sample the average GDP share of mineral output of Quebec and Prince Edward Island is less than 1 %, while that of Alberta and Saskatchewan is more than 20 %.

  3. Whether the manufacturing sector will be negatively affected in a disproportionate manner (as often assumed in the DD literature; see Larsen 2006 and Torvik 2001) will largely depend on the relative export orientation of the sector.

  4. These include wholesale trade, retail trade, and manufacturing.

  5. The sample includes Yukon, Northwest Territories and the 10 Canadian provinces. This is a maximised panel that covers all years and provinces/territories for which data is available. Unless specified otherwise, all data was retrieved from Statistics Canada. See Appendices 1 and 2 for descriptive statistics, definitions, and data sources for all variables.

  6. Specifications are annual-based; we test different time frames as robustness checks in a subsequent section.

  7. Given the homogenous intra-federal environment in Canada, cross-provincial variations in standard variables such as institutional quality, education, income, and investment, are relatively small, which is why we abstract from adding these to our specifications. Nevertheless we note that results do not change if additional measures are included to control for the aforementioned variables (results available from the authors).

  8. Prices for other minerals largely co-move with changes in the price of crude oil, see Chaudhuri (2001); we employ oil prices given that oil production accounts for a large share of total mineral value. Data on prices were retrieved from the World Bank GEM Commodity database.

  9. Note that Northwest Territories is not included in the graph due to data availability.

  10. Hausman tests for each of Eqs. 1–3 reject the random effects specifications in favour of the fixed effects ones (i.e. the null hypothesis is rejected at the 1 % level in all cases).

  11. Note that this is not critical for our results, which remain qualitatively the same even when each equation only controls for resource abundance and is estimated separately using OLS so that the general equilibrium effects are not accounted for (results are available from the authors).

  12. We add the three level values (prices, capital, labour) in the previous period to be consistent with the specification presented in Eqs. 1–3; nevertheless, we note results do not change qualitatively in case these are not included.

  13. Undertaking a Hausman Test for Eq. 4 yields a \(p\)-value close to 0, thus rejecting the null hypothesis and motivating our use of a fixed effects framework (over a random effects one).

  14. Data retrieved from the World Bank GEM Commodity database. The Agriculture Price Index, constructed by the World Bank, presents an average measure of international prices of various agricultural goods.

  15. Results are similar when investigating the separate DD channels; however, since the end result indicates that there is no significant correlation with exports, we abstract from presenting these.

    Table 3 Testing for cross-regional Dutch Disease effects in Canada—robustness checks (Panel, 1992–2008, 1-year intervals)
    Full size table

  16. See Isham et al. (2005), Ross (2001), Sala-i-Martin and Subramanian (2003).

  17. The spatial lag exhibits little correlation with the resource measures of both the province’s own resources as well as that of the rest of Canada, so that multicolinearity is not a concern. Nevertheless, we note that results do not change qualitatively in case any of these measures is not included in the specification.

  18. Nonetheless, the results of Beine et al. (2012) imply that when aggregated the spatial effects dominate.

  19. In the estimations in Table 4, in which different time frames are used, variables were measured as described, only for the corresponding time periods.

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Author information

Authors and Affiliations

  1. Institute for Environmental Studies, Vrije Universiteit Amsterdam, Amsterdam, The Netherlands

    Elissaios Papyrakis

  2. School of International Development, University of East Anglia, Norwich, UK

    Elissaios Papyrakis

  3. Department of Economics, Hebrew University of Jerusalem, Jerusalem, Israel

    Ohad Raveh

Authors
  1. Elissaios Papyrakis
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  2. Ohad Raveh
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Corresponding author

Correspondence to Ohad Raveh.

Appendices

Appendix 1

See Table 6.

Table 6 Descriptive statistics
Full size table

Appendix 2: List of Variables Used in the Regressions

All variables cover the period of 1984–2008, and are annually and regionally based.Footnote 19 Unless specified otherwise, data are provided by Statistics Canada (Canada’s national statistical agency: www.statcan.gc.ca/start-debut-eng.html).

Mineral production

GDP share of mineral (oil, gas, minerals) output at the beginning of the period multiplied by the average annual price of crude oil (World Bank, GEM Commodities Database)\(^{\mathrm{a}}\)

Non-mineral resources

GDP share of non-mineral resources (agriculture, fishing, forestry, hunting) output at the beginning of the period multiplied by the average annual Agriculture Price Index (World Bank, GEM Commodities Database)

Mineral exports

GDP share of mineral (oil, gas, minerals) exports at the beginning of the period multiplied by the average annual price of crude oil (World Bank, GEM Commodities Database)

Mineral production, rest of Canada

Canadian GDP share of mineral (oil, gas, minerals) output in Canada (net of that in the source region) at the beginning of the period multiplied by the average annual price of crude oil (World Bank, GEM Commodities Database)

Non-mineral resources, rest of Canada

Canadian GDP share of non-mineral resources (agriculture, fishing, forestry, hunting) output in Canada (net of that in the source region) at the beginning of the period multiplied by the average annual Agriculture Price Index (World Bank, GEM Commodities Database)

Mineral exports, rest of Canada

Canadian GDP share of mineral (oil, gas, minerals) exports in Canada (net of that in the source region) at the beginning of the period multiplied by the average annual price of crude oil (World Bank, GEM Commodities Database)

GDP share of mineral output

The share of mineral (oil, gas, minerals) output in GDP.

GDP share of mineral output, rest of Canada

Canadian GDP share of mineral (oil, gas, minerals) output in Canada (net of that in the source region)

GDP share of mineral exports

The share of mineral (oil, gas, minerals) exports in GDP

GDP share of mineral exports, rest of Canada

Canadian GDP share of mineral (oil, gas, minerals) exports in Canada (net of that in the source region)

Real mineral output per capita

real mineral (oil, gas, minerals) output in 2002 prices, divided by population

Real mineral output per capita, rest of Canada

Real mineral (oil, gas, minerals) output in Canada (net of that in the source region) in 2002 prices, divided by population in Canada (net of that in the source region)

Real mineral exports per capita

real mineral (oil, gas, minerals) exports in 2002 prices, divided by population

Real mineral exports per capita, rest of Canada

Real mineral (oil, gas, minerals) exports in Canada (net of that in the source region) in 2002 prices, divided by population in Canada (net of that in the source region)

Inflation

Regional inflation rates per annum. Computed as the change in regional price levels

Capital Movement

The annual percentage change in the share of capital in non-primary tradable sectors (out of total capital). The non-primary tradable sectors include (based on NAICS): Wholesale trade, retail trade, and manufacturing

Labour Movement

The annual percentage change in the share of labour in non-primary tradable sectors (out of total capital). The non-primary tradable sectors include (based on NAICS): Wholesale trade, retail trade, and manufacturing

Prices

Regional price levels (consumer price index based)

Capital

The share of capital in non-primary tradable sectors out of total capital. The non-primary tradable sectors include (based on NAICS): Wholesale trade, retail trade, and manufacturing

Labour

The share of labour in non-primary tradable sectors out of total capital. The non-primary tradable sectors include (based on NAICS): Wholesale trade, retail trade, and manufacturing

Growth of international exports (m)

The annual percentage change in the GDP share of region-specific non-mineral (oil, gas, minerals) exports to other countries

International exports (m)

GDP share of region-specific non-mineral (oil, gas, minerals) exports to other countries.

Growth of international exports (a)

The annual percentage change in the GDP share of region-specific non-diffuse-source (agriculture, fishing, forestry, hunting) exports to other countries

International exports (a)

GDP share of region-specific non-diffuse-source (agriculture, fishing, forestry, hunting) exports to other countries

Growth of domestic exports (m)

The annual percentage change in the GDP share of region-specific non-mineral (oil, gas, minerals) exports to other Canadian provinces and territories

Domestic exports (m)

GDP share of region-specific non-mineral (oil, gas, minerals) exports to other Canadian provinces and territories

Spatial lag (m)

Mineral production (constructed as described above) of all regions multiplied by a distance weighting matrix, which records inverse Euclidean distances between the most populated cities of each province/territory, and normalised by provincial GDP

Spatial lag (a)

Non-mineral resource production (constructed as described above) of all regions multiplied by a distance weighting matrix, which records inverse Euclidean distances between the most populated cities of each province/territory, and normalised by provincial GDP

  1. Note that variables marked with ‘m’ refer to mineral based measures, whereas those marked with ‘a’ refer to non-mineral based measures
  2. \(^{\mathrm{a}}\) In Regressions 33–35 the initial GDP share of mineral output is not multiplied by the price measure (given the cross-sectional framework)

Appendix 3

See Table 7.

Table 7 Robustness tests with alternative resource measures
Full size table

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Papyrakis, E., Raveh, O. An Empirical Analysis of a Regional Dutch Disease: The Case of Canada. Environ Resource Econ 58, 179–198 (2014). https://doi.org/10.1007/s10640-013-9698-z

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