Asymmetries in the effect of oil rent shocks on economic growth: A sectoral analysis from the perspective of the oil curse

We provide new insight into the oil curse hypothesis by considering the asymmetric reaction of aggregate and sector-level growth to positive and negative oil rent shocks. Using a Nonlinear Autoregressive Distributed Lag (NARDL) approach for the case of Malaysia, we find that economic growth responds to positive and negative oil rent shocks asymmetrically in the long run. While this asymmetry is also confirmed at sector-level analysis, the nature of the response to oil rent shocks varies significantly across economic sectors. Our analysis supports the oil curse hypothesis in Malaysia, and this curse channels via Dutch Disease mechanism in the manufacturing sector. The results suggest that, even though diversification remains a key policy agenda to decrease the level of oil rent dependence, policymakers should consider the harmful impact of oil rent decrease on the growth of certain economic sectors. Thus, the effectiveness of any diversification policy mainly depends on whether policymakers have a complete understanding of the heterogeneous response of economic sectors to oil rent shocks.

Automated summary

The study reveals asymmetric reactions of economic growth to positive and negative oil rent shocks in Malaysia, which also vary significantly across economic sectors. The analysis supports the oil curse hypothesis in Malaysia, with the curse channeled through the Dutch Disease mechanism in the manufacturing sector. The results highlight the importance for policymakers to consider the heterogeneous response of economic sectors to oil rent shocks when implementing diversification policies.