Revisiting the Commodity Curse: a Financial Perspective

We study the response of a three-sector commodity-exporter small open economy to a
commodity price boom. When the economy has access to international borrowing and
lending, a temporary commodity price boom brings about the standard wealth effect that
stimulates demand and has long-run implications on the sectoral allocation of labor. If
dynamic productivity gains are concentrated in the traded goods sector, the commodity
boom crowds out the traded sector and delays convergence to the world technology
frontier. Financial openness by stimulating current demand amplifies the crowding out
effect and may even lead to a growth trap, in which no resources are allocated to the
traded sector. From a normative point of view, our analysis suggests that capital account
management policies could be welfare improving in those circumstances.