Absorptive Capacity and the Impact of Commodity Terms of Trade Shocks in Resource Export-Dependent Economies

26 Pages Posted: 19 Jul 2016

See all articles by Akiko Terada-Hagiwara

Akiko Terada-Hagiwara

Asian Development Bank

Mai Lin Villaruel

Asian Development Bank

Christopher Edmonds

Asian Development Bank

Date Written: June 2016

Abstract

This paper investigates the role of “absorptive capacity” to manage unexpected shocks to their real economy, with a focus on small, open, natural resource-dependent economies. A quarterly panel data series for 45 countries is constructed, including 23 developing Asian countries for empirical investigation. For the entire sample, the analysis finds that absorptive capacity, choice of exchange rate regime, presence of wealth funds, level of foreign reserves, or degree of resource dependency alone, does not matter when real shocks are introduced to output. However, levels of absorptive capacity or ability to use resource windfalls effectively, and foreign reserves begin to matter when the sample is restricted to resource-dependent countries. Case studies from Papua New Guinea and Timor-Leste support this claim highlighting the challenges they face with a sudden influx of natural resource revenues when capacity to effectively use fiscal revenues is limited.

Keywords: absorptive capacity, economic growth, natural resources, real exchange rate, terms of trade

JEL Classification: F14, F43, H11

Suggested Citation

Terada-Hagiwara, Akiko and Villaruel, Mai Lin and Edmonds, Christopher, Absorptive Capacity and the Impact of Commodity Terms of Trade Shocks in Resource Export-Dependent Economies (June 2016). Asian Development Bank Economics Working Paper Series No. 487, Available at SSRN: https://ssrn.com/abstract=2811538 or http://dx.doi.org/10.2139/ssrn.2811538

Akiko Terada-Hagiwara (Contact Author)

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Mai Lin Villaruel

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Christopher Edmonds

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

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