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sector to expand. This may lead to the paradoxical result of pro-industrialization if capital-
intensive manufacturing constitutes the traded sector, despite some offsetting effects arising
from the de-industrialization effects arising from an appreciation of the real exchange rate
(Corden and Neary, 1982). If the non-traded sector is more capital intensive, the real
exchange rate depreciates if labour is needed to secure the resource windfall; the Rybczinski
theorem then says that the non-traded sector expands and the traded sector contracts. This
increase in relative supply of non-traded goods fuels depreciation of the real exchange rate.
Real exchange depreciation may also result from a boost to natural resource exports if the
traded sector is relatively capital intensive and capital is needed for the exploitation of natural
resources (Neary and Purvis, 1982). Since less capital is available for the traded sector, less
labour is needed and thus more labour is available for the non-traded sector. This may lead to
a depreciation of the real exchange rate. This also occurs if the income distribution is shifted
to consumers with a low propensity to consume non-traded goods (Corden, 1984).
Empirical evidence for Dutch disease effects
Although early evidence for a shrinking manufacturing sector in response to terms of trade
shocks and real appreciation has been mixed (Sala-i-Martin and Subramanian, 2003), more
recent evidence for 135 countries for the period 1975-2007 indicates that the response to a
resource windfall is to save about 30 percent, decrease non-resource exports by 35-70 percent,
and increase non-resource imports by 0-35% (Harding and Venables, 2010). These findings
hold in pure cross-sections of countries (averages across one, two, three or four decades), in
pooled panels of countries, and in panel estimations including dynamics and country fixed
effects. Another study uses detailed, disaggregated sectoral data for manufacturing and
obtains similar results: a 10.0 percent oil windfall is on average associated with a 3.4% fall in
value added across manufacturing, but less so in countries that have restrictions on capital
flows and for sectors that are more capital intensive (Ismail, 2010). Using as a counterfactual
the Chenery-Syrquin (1975) norm for the size of tradeables (manufacturing and agriculture),
countries in which the resource sector accounts for more than 30% of GDP have a tradables
sector 15 percentage points lower than the norm (Brahmbhatt, et al., 2010). The
macroeconomic and sectoral evidence thus seems to offer support for Dutch disease effects.
Interestingly, macro cross-country and micro US county level evidence suggests that resource
rich countries experience de-specialization as the least skilled employees move from
manufacturing to the non-traded sectors thus leading their traded sectors to be much more
productive than resource poor countries (Kuralbayeva and Stefanski, 2010).
Quasi-experimental, within-country evidence on the Dutch disease for Brazil has
recently also become available (Caselli and Michaels, 2009). This study exploits a dataset on
oil dependence for Brazilian municipalities, which is useful as oil fields are highly