DP15271 Good mine, bad mine: Natural resource heterogeneity and Dutch disease in Indonesia

Author(s): Paul Pelzl, Steven Poelhekke
Publication Date: September 2020
Keyword(s): Dutch disease, Indonesia, labor intensity, mining, Natural resources, traded sector
JEL(s): F00, L16, L60, L72, O12, O13, Q30
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15271

We analyze the local effect of exogenous shocks to the value of mineral deposits on a panel of manufacturing plants in Indonesia. We introduce heterogeneity in natural resource extraction methods, which helps to explain the mixed evidence found in the `Dutch disease' literature. In districts where mineral extraction is relatively capital intensive, mining booms cause virtually no upward pressure on manufacturing wages, and both producers of more heavily traded and relatively less-traded manufacturing goods benefit from mining booms in terms of employment. In contrast, labor-intensive mining booms drive up local wages such that heavily traded goods producers respond by reducing employment.