Threshold effects in the relationship between oil revenues and growth in oil exporting countries

While there is much evidence to support the resource curse hypothesis for resource abundant countries, some studies have found that oil booms raise the economic growth of oil exporting countries. This paper examines the issue of the existence of the threshold effects in the relationship between oil revenues and output growth in oil-exporting countries, applying panel regressions. The empirical results strongly suggest the existence of a threshold beyond which oil revenues growth exerts a negative effect on output. The results indicate that the threshold of growth rate of oil revenues above which oil revenues significantly slows growth is around 18–19 percent for oil exporting countries. In contrast, linear estimation without any allowance for threshold effects would misleadingly have us believe that an increase in the oil revenues increase the growth rate. Failure to account for nonlinearities conceal the resource curse in these countries particularly during extreme oil booms as suggested in previous studies.