The “Dutch Disease” and Strands of the Resource Curse Literature Notes

Introduction Explain the “Dutch Disease” Term invented to describe a phenomenon first noted in the Netherlands after the discovery of natural gas in the 60’s, following which manufacturing declined and enemployment increased (OECD 2006) The concept became prominent amongst economic theorists in the 1980’s and is now generally accepted both amongst economists, governments and political bodies following confirmation through empirical research (Inc NetLibrary 2008) More generally, the term means “the harmful economic consequences that may arise in certain conditions from a sudden increase in a country’s wealth” (OECD 2006) The notion is tied to the economy and exchange rate: a boom in one sector of the country’s economy dealing with international tradable goods leads to a decline in other sectors as exchange rates appreciate, those sectors making non-tradable goods expand, and the end result is less competitiveness overall (Zaqqa 2006). The concept assumes a simple economic model which features a binary distinction between two types of goods, the internationally tradable and the internationally non-tradable (Zacca 2006). The ‘Dutch Disease’ following the discovery of natural resources has a number of other problematic consequences, including poor growth, authoritarian regimes, civil war and government corruption (Inc NetLibrary 2008). The phenomenon is difficult to correct, and leads to problems of managing the economy, for example if the government borrows to sustain normal spending levels, this is likely to make recession more prolonged and severe. (Inc NetLibrary 2008) If a nation concentrates upon developing the natural resource and does not invest in other sectors, there may be “high uncertainty, chronic low rates of domestic investment, inadequate skills levels” (Inc NetLibrary 2008) Describe at least two different strands of the resource curse literature The term ‘resource curse’ was first introduced by Auty (1993), to denote a phenomena whereby countries with high levels of natural resources also frequently have lower growth rates (Cornell 2010) Much of the literature which tries to explain the ‘resource curse’ takes either an economic or a political/social perspective (Di John, 2009) Economic perspectives explain the ‘resource curse’ in terms of a nation’s economy, and include different aspects, for example the volatility of commodity prices leading to decreasing revenues, and the way these form relationships with ‘financial market imperfections”. They can also highlight the relationship between the natural resource and other sectors in the economy (Ellman 2006), or take a ‘rentier-state’ approach, suggesting that natural resources generate “rent-seeking behaviour”. The Dutch Disease approach highlights the role of exchange rates, international and non-international trade, and competitiveness of different sectors (Di John 2009). Political explanations widen the economic perspective by suggesting that government policy and institutional structures play a central role in creating the resource curse (Di John 2009) Political explanations of the resource curse are varied: they can use, for example “cognitive, societal or statist approaches”. Cognitive approaches hold that natural resources lead to short-sighted economic policies from the government, societal approaches suggest that a natural resource boom allocates resources to social groups which are not committed to the overall long-term benefit of the country, and statist approaches hold that a natural resource boom leads to a weaker government and poorer policies for long-term economic management (Gallagher 2008). Some claim that there is less empirical support for political and social explanations (Kim 2003) References

Auty, R (1993) Sustaining development in mineral economies: the resource curse thesis, Routledge, London

Di John, J (2009) From Windfall to CurseOil and Industrialization in Venezuela, 1920 to the Present, Penn State Press, USA

Cornell, S E (2010) Azerbaijan Since Independence, M.E. Sharpe, NY

Ellman, M (2006) Russia’s Oil and Natural Gas: Bonanza Or CurseAnthem Press, London

Gallagher, K (2008) Handbook on trade and the environment, Edward Elgar Publishing, UK

Kim, Y (2003) The resource curse in a post-communist regime: Russia in comparative perspective, Ashgate Publishing, Ltd., Aldershot Hants

Inc Net Library (2008) Survey of Economic and Social Developments in the ESCWA Region 2006-2007, United Nations Publications.

Organisation for Economic Co-operation and Development (2006) OECD Economic Surveys: Russian Federation 2006, Paris, France

Zaqqa, N (2006) Economic development and export of human capital – a contradiction?: the impact of human capital migration on the economy of sending countries ; a case study of Jordan, Kassel University Press.