Investigating the Transmission Channels behind Dutch Disease Effects : Lessons from Mongolia Using a CGE Model
This paper uses a computable general equilibrium model -- Maquette for Millennium Development Goal Simulations (MAMS) -- calibrated to Mongolia to investigate how the development of major mining projects leads to Dutch disease. The simulations sugg...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2017
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/360391504722434946/Investigating-the-transmission-channels-behind-Dutch-disease-effects-lessons-from-Mongolia-using-a-CGE-model http://hdl.handle.net/10986/28360 |
| Summary: | This paper uses a computable general
equilibrium model -- Maquette for Millennium Development
Goal Simulations (MAMS) -- calibrated to Mongolia to
investigate how the development of major mining projects
leads to Dutch disease. The simulations suggest that the
process is complex, with the relative strength of the
different spending and resource movement channels determined
by structural features of the economy, such as factor input
needs of the mining sector and substitution elasticities,
and how mineral windfalls are eventually spent. In Mongolia,
mining sector demand for domestic factor inputs explains
two-thirds of the appreciation of the real exchange rate,
with demand for labor, a "quasi-fixed" factor, the
most potent channel for transmitting Dutch disease. The
simulations also suggest that public policies may only play
a limited role in limiting Dutch disease, even if growing
fiscal revenues are channeled toward productivity-enhancing
public investment rather than public consumption or lower
taxes. This finding suggests that policy makers face real
trade-offs, namely that, as an equilibrium response, Dutch
disease is unavoidable and at odds with an export-led,
manufacturing-oriented development strategy unless resources
are left in the ground (or mining earnings are saved
abroad). If the objective is to limit Dutch disease, then
the simulations point to policies that minimize the usage of
domestic inputs by the mining sector, or that accommodate
the growing demand for key inputs such as labor e.g. through
immigration. Regarding spending, policy makers should
channel mining revenues toward public investment, to expand
the economy's long-run supply potential. Where large
direct income flows from the mining sector to households are
important, monetary policy may be more useful than fiscal
policy in constraining private spending. |
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