Dutch Disease

When we think of countries with large reserves of natural resources that are also very valuable, we assume that it makes the country rich. We feel envious: they don’t have to work hard to get rich, they just happened to own the right patch of land.

Or is it? And no, I am not talking of the case where a handful of people own, say, the oil field, and mint money while the rest of the population stays poor. Turns out the situation is more complicated.

First, if the country doesn’t have the expertise to extract or process that resource, they inevitably rely on foreigners to do the same. Which means a good chunk of the money goes out of the country.

Second, extracting resources from oil fields or mines is hardly a well paying job, so most of the jobs created are hardly making people rich.

Third, if the resource was found in a poor country, they often strike poor deals with foreigners because they’re looking at prices from their current (poverty-striken) levels.

Fourth, if that resource happens to be exported (like oil or diamonds), then inevitably the currency of that country appreciates. Which in turn makes all other exports from that country suffer since they become more expensive. In other words, the new found resource boom ends up being a bad thing for other industries in that country!

Fifth, even if the country is trying to use this new found wealth well across all its citizens, it’s never easy. There’s a temptation to use it for unproductive ends like subsidies and tax breaks. None of these add value or trigger new skills in society which would benefit the country in the long run.

You might think that many of the above reasons would apply for any new way a country finds to generate wealth (like outsourcing, for example). But there’s a difference: those ways take time and thus give countries time to acclimatize to the newly forming normal. More time allows better ways to evolve.

Oh, in case you were wondering, the title of this blog, Dutch disease, originates from these exact problems that arose in Holland in the 1960s due to the discovery of vast natural gas deposits in the North Sea. Which also disproves the idea that the above problem could only happen in dictatorships or uneducated or poor countries.

As they say, be careful what you wish for, you might get it.