Commodity Windfalls, Polarization, and Net Foreign Assets: Panel Data Evidence on the Voracity Effect
25 Pages Posted: 1 Feb 2011
Date Written: September 2010
This paper examines the effect that windfalls from international commodity price booms have on net foreign assets in a panel of 145 countries during the period 1970-2007. The main finding is that windfalls from international commodity price booms lead to a significant increase in net foreign assets, but only in countries that are homogeneous. In polarized countries, net foreign assets significantly decreased. To explain this asymmetry, the paper shows that in polarized countries commodity windfalls lead to large increases in government spending, political corruption, and the risk of expropriation, with no overall effect on GDP per capita growth. The paper's findings are consistent with theoretical models of the current account that have a built-in voracity effect.
Keywords: Asset management, Commodities, Commodity price fluctuations, Cross country analysis, Current account, Current account surpluses, Economic models, Government expenditures, Political economy, Time series
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