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30 January 2019

Dutch Disease?



A few weeks ago, in a column on this site, Bill Prast referred to the ‘Dutch Disease’. That may sound either like something trees get or an illness incurred from a too-detailed association with the ‘products’ on display in the windows in certain quarters in Amsterdam, but in fact it is a description of the dangers to an economy of a sudden boom in one sector, usually, but not definitively, raw materials. The theory suggests that a surge in a nation’s natural resource production - oil, gas, copper, whatever - and the explosion of wealth in that sector, will have a detrimental effect on the rest of the economy. Thus, for example, a major oil discovery would attract investment and labour away from other sectors, resulting in stunted growth there and thus unbalancing the economy. At the same time, the unbalancing is exacerbated because - since natural resource commodities are priced on an international market - there is likely to be a relative strengthening of the currency, further harming the weaker parts of the economy. 

Well, that’s the essentials of the theory; it was so named, incidentally, after a major gas discovery offshore of the Netherlands in 1959 was perceived to have had precisely this effect on the Dutch economy. There are lots of examples quoted, some more convincing than others. We could look at the UK twice; once after North Sea oil began to flow, and again, some years later, when the booming financial services sector came to dominate the economy, and distort, particularly, the geographic north/south divide. Then there is Russia in the 2000s, when oil and gas exports dominated; likewise Nigeria and various other African oil producing states. Norway, of course, reacted differently, and instead of allowing the oil wealth they generated to flow completely freely and risk unbalancing the economy, they held back income in a sovereign wealth fund, so the effects of a similar surge as that in the UK at the same time were very different. Of course, one could argue that the same tactics would not necessarily work with a population of sixty-odd million rather than about five and a half, but that debate is not for now. There are of course lots of other examples, some of which appear to support the theory, some of which don’t.

So why talk about this now? Well, there seems to be a case unfolding before our eyes, with a nasty little added political dimension. I speak, of course, of Venezuela. Fortunate Venezuela, with some of the largest oil reserves in the world; and although we may all be switching to a greater or lesser degree to renewable forms of energy, oil demand is not going away for a long time to come. 

Fortunate Venezuela? Well, that’s how it looked. Huge oil reserves, a diversified economy - for those of us in the metals business, production of aluminium and ferro-silicon - a healthy middle class and seeming stability. Signs of the Dutch Disease came, though, after the election of Hugo Chavez, who effectively bet the ranch on oil production in order to fund his social programme. Other industries began to fade - or were taken into state ownership, with a similar result - although actually the initial phase of the government in fact seemed to work quite well. Health care, social care, education - all improved under the wall of oil-generated money thrown at them. So it all looked rosy at that point, except of course that it was a dictatorship, despite the fiction of free elections.

Sadly, though, when the oil price and the income it generated dropped, things started to go badly amiss. Dutch disease, combined with a rigid state control, left the economy gasping, as there was no longer the money to pay for the state and it’s grip on everything. Borrowing rocketed, as did the interest cost to an already struggling exchequer. The story then gets nastier, as the totalitarian regime doubled down on state control, refusing to accept the reality that their policies had rendered the county’s economy unworkable, and that with three digit (or more) inflation, and virtually nobody except Russia and China prepared to make any more loans, bankruptcy was pretty much inevitable. 

What we see there now - hunger, shortages of basic necessities, civil unrest, draconian military control - is a direct result of economic mismanagement. The country was forced into over-reliance on one economic sector - oil - and left unable to function when the price dropped. Doctrinaire marxist-socialist ideology exacerbated the problem, with its obsession with state control (which we have seen time and time again never leads to good things). So along with the dropping oil price, Venezuela’s oil production dropped as well, further reducing income, and by now the rest of the economy had pretty much shut down. Oh, and a small side order of kleptocracy - check out some of the articles about Chavez family/Maduro wealth. 

And yet, a number of senior members of the UK opposition party have chosen to write a letter - to the Guardian newspaper, where else? - pointing the finger of blame for the current mess squarely at ‘western capitalist imperialism’ and the rest. 

Frankly, if you don’t laugh at these people, you’re going to cry.                  

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