Oil, Agriculture, and the Public Sector: Linking Intersector Dynamics in Ecuador

Abstract

In a recent paper, Fiess and Verner (2000) analyze sectoral growth in Ecuador and find significant long-run and short-run relationships between the agricultural, industrial, and service sectors. They take this as evidence against the dual economy model which rules out a long-run relationship between agricultural and industrial output and show further that a more detailed picture of the growth process can be discovered, once the agricultural, industrial, and service sectors are disaggregated further into intrasector components. Fiess and Verner extend their initial results and provide insight from a multivariate cointegration analysis of intrasector components. They are able to identify three cointegrating relationships, each of which has its own meaningful economic interpretation - two cointegration relationships capture the direct and indirect effects of the "petrolization" of the Ecuadorian economy. A third relationship clearly indicates a link between agriculture and industrial activity. Since this third cointegrating relationship seems to coincide in time with the trade liberalization at the end of the 1980s, promoting agriculture appears to be an important way to promote sustainable economic growth in Ecuador.

This paper - a product of the Office of the Chief Economist and the Economic Policy Sector Unit, Latin America and the Caribbean Region - is part of a larger effort in the region to better understand intersectoral growth dynamics.