Distribution of Resource Rents and Deindustrialization : The Role of Luxury Goods

Developing natural resource rich (DNRR) countries exhibit a significant propensity for consuming luxury manufacturing products, primarily driven by the windfall generated from their abundant natural resources. However, they often lack the domestic capacity to produce these products. We demonstrate theoretically that within a framework featuring monopolistic competition and trade costs, a shift in demand from ordinary to luxury manufacturing goods leads to a contraction of the domestic manufacturing sector and to a decline in non-resource GDP in DNRR countries. By linking the demand for luxury goods to income distribution, our model predicts that an unequal distribution of natural resource rents exacerbates the deindustrialization (Dutch disease) effect of these windfalls. We empirically test this theoretical prediction by analyzing a sample of 90 non-OECD countries from 1980 to 2019. We employ three different methodological approaches for our analysis: (i) System GMM, (ii) PMG-ARDL, and (iii) CCE-PMG-ARDL