Empirical Investigation of Dutch Disease: Case of Kazakhstan

Abstract

On reviewing the academic literature regarding Dutch disease, one cannot help but notice that there are signs of Dutch disease in the economy of Kazakhstan, for example, the shrinking agricultural sector, weak levels of industrialization, and most importantly, the booming oil sector. However, despite numerous empirical studies on this phenomenon in relation to a number of countries worldwide, there is a shortage of empirical analysis of Dutch disease in the case of Kazakhstan. This paper aimed to bridge that gap by researching how the booming oil sector, which is largely price-led, has affected lagging sectors such as manufacturing and agriculture. To facilitate an analysis of Dutch disease, the study examined how oil price channel influences real exchange rate, how the real exchange rate affects lagging sectors, and how the booming oil sector changes lagging sectors in the Kazakhstan economy. To this end, data was gathered from the National Bank, the National Statistics Agency, and the Statistics Agency of Commonwealth of Independent States (CIS) for the period between 2000 and 2013. The hypothesis was tested by applying the vector error correction model (VECM) approach of stationarity tests, cointegration tests, stability tests, and Granger causality tests. No explicit evidence of Dutch disease was observed as a result of the above testing. The paper concludes that Dutch disease is effectively concealed, since all three channels studied are subject to the real exchange rate, and the National Bank of Kazakhstan’s “regulated floating exchange rate policy” is more or less a manipulation of the real exchange rate.