10
resource bonanza thus increases welfare. 4 The short-run effects of the Dutch disease on
unemployment are discussed in appendix 1.
For the longer run effects one must allow capital and labour to be mobile across
sectors and move beyond the specific factors framework. In an open economy Heckscher-
Ohlin framework with competitive labour, capital and product markets, no resource use in
production and constant returns to scale in the production of traded and non-traded goods, a
natural resource windfall induces a higher (lower) wage-rental ratio if the non-traded sector is
more (less) labour-intensive than the traded sector. In any case, there is a rise in the relative
price of non-traded goods leading to an expansion of the non-traded sector and a contraction
of the traded sector. Labour and capital shift from the traded to the non-traded sectors. More
interesting may be to study the effects of a resource boom in a dynamic dependent economy
with adjustment costs for investment and allow for costly sectoral reallocation of capital
between non-traded and traded sectors (Morshed and Turnovsky, 2004). It is then more costly
to transform one form of existing capital into another, since this involves demolition. This
way one has factor specificity for each sector in the short run and factor mobility across
sectors in the long run. An advantage of this approach is that in the short and medium run the
real exchange rate is no longer fully determined by the supply side and does not adjust
instantaneously. If a greater fraction of resource revenues is saved, the initial appreciation of
the real exchange rate will be less and will eventually be reversed (see appendix 4). One could
also use a model of endogenous growth in the dependent economy (e.g., Turnovsky, 1996) to
explore the implications of a resource boom on economic growth.
What happens if the exploitation sector uses labour and capital as factor inputs? Apart
from the hitherto discussed spending effects of a resource boom, there are also resource
movement effects (Corden and Neary, 1982). De-industrialization occurs on account of the
usual appreciation of the real exchange rate (the spending effect), but also due to the labour
drawn out of both the non-traded and traded sectors towards the resource sector (the resource
movement effect). Looking at the longer run where both factors of production (labour and
capital) are mobile between the traded and non-traded sectors and the resource sector only
uses labour, it helps to consider a mini-Heckscher-Ohlin economy for the traded and non-
traded sectors. The Rybczinski theorem states that the movement of labour out of the non-
resource towards the resource sectors causes output of the capital-intensive non-resource
4 More elegant is to use duality (Neary, 1988). Let Z(p) denote non-resource national income, so that
Z'(P ) equals non-traded output. Equilibrium in traded and non-traded goods is given by Z(P ) + QE =
e(P)U and Z'(P) = e'(P) U, respectively, where e(P) = Y/U indicates the CPI and U denotes real
consumption (utility). It follows that dU/d(QE) = 1/e(P) > 0 and dP/d(QE) = (PCN/Y)∕(εs +εD), so that
windfall revenue from abroad boosts utility. It also leads to an appreciation of the real exchange rate,
especially if the share of non-traded goods in the consumption basket is large, the supply elasticity εS ≡
PY"/CN > 0 is large and the demand elasticity εD ≡ - Pe"U/CN > 0 is large. If labour supply increases
with the real consumption wage (migrants, informal labour), the real exchange rate appreciates less.