Commodity windfalls, polarization, and net foreign assets: panel data evidence on the voracity effect

Commodity windfalls, polarization, and net foreign assets: panel data evidence on the voracity effect

Basic inter-temporal theory of the current account predicts that countries which experience temporary revenue windfalls from international commodity price booms should experience an increase in their net foreign assets. This paper examines the effects that windfalls from international commodity price booms have on net foreign assets in a panel of 145 countries during the period 1970-2007.

The document finds that:

  • the average marginal effect of commodity price windfalls on net foreign assets is positive but statistically insignificant
  • the marginal effect of revenue windfalls from commodity price booms on net foreign assets is significantly smaller in countries that are characterised by high levels of ethnic polarisation
  • on the other hand, in countries with low levels of ethnic polarisation commodity windfalls lead to a significant increase in net foreign assets
  • still, in the ethnically homogeneous countries, where the commodity price windfall lead to a significant improvement of the account, GDP per capita growth significantly increase following the commodity price boom

To explain these findings, the paper shows that in ethnically polarised countries commodity windfalls lead to large increases in government consumption expenditures and political corruption. This, in turn, entails excessive fiscal resource appropriation by powerful groups and so this is precisely the channel through which net foreign assets decrease in the voracity model.