The Resource Curse: Does Fiscal Policy Make a Difference?

This paper explores empirically the relationship between commodity prices, fiscal policy, and income per capita. First we construct time-varying indicators of fiscal cyclicality for 121 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 groups 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. The cyclical conduct of fiscal policy explains a large fraction of the long-run effects of commodity prices on GDP per capita. The systematic response of fiscal spending to changes in commodity prices beyond the cyclical stance of the economy is relevant for obtaining this result. In general, if fiscal policy is conducted in a procyclical way, the long-run effect of an increase in commodity prices becomes more negative. But this is not always the case.For certain commodities and group of countries the effect is the opposite. All of these results are driven by the time variation in fiscal policy and obtained after controlling for institutional quality.