dutch disease
TRANSCRIPT
DUTCH DISEASE (RESOURCE CURSE)
Impact on international competitiveness
Team:Artem Chepurnoy
Vera Lazarenko
Dmitriy Kovalenko
Dmitriy Asinovskiy
Evgenia Belova
What is the Natural Resource Curse?
Many developing countries with abundant natural resources experience lower rates of economic growth and development than countries with few natural resources
“Dutch Disease”
The Economist (1977)
1960s – Discovery of large natural gas deposits in the North Sea
Subsequent shift in resources and decline in the manufacturing sector
Dutch Disease1970s: Netherlands
Influx of revenue from natural gas led to increased spending on social programs
Dutch Disease1970s: Netherlands
“Crowding out” of manufacturing led to lost jobs Creation of “safety net” social programs resulted
in high levels of unemployment and disabilities
Netherlands: Export Performance
Researches concerned about the reasons of worsened export performance
How does it work?
Cordon and Neary model, 1982
The Specific Factor Model
TRADABLE
NON-TRADABLE WO
RLD
ECO
NO
MYManufacturing
Energy/Mineral
COU
NT
RY E
CON
OM
Y
The Specific Factor Model
– relative international prices for tradable goods are fixed
– price for non-tradable goods is determined by demand and supply
The Specific Factor Model
TRADABLE
NON-TRADABLE
Manufacturing
Energy/Mineral
Labo
r
Manufacturing-type capital
Natural resources
Non-tradable-type capital
The Specific Factor Model
Each sector uses two factors of production:
- specific factor of production for sector - labor, which is perfectly mobile among sectors The real wage is perfectly flexible
Spending effect
There is a boom in mineral sector, which increases country GDP and thus demand in the country .
Let’s suppose, the demand increases equally on manufacturing and on non-tradable products.
Manufacturing goods market
𝑃
𝑄𝑄1
𝑃
𝑄2
Non-tradable goods market
𝑃
𝑄𝑄1
𝑃1
𝑄2
𝑃2
Spending effect
So, the price for non-tradable goods rises in terms of tradable goods
This makes production of non-booming tradable goods less attractive for domestic producers
Finally, tradable goods (manufacturing) sector narrows
Factor reallocation effect
𝑂𝑥 𝑂 𝑦
𝑤 𝑤
𝐿1
𝑤1𝑤1
Man
ufac
turi
ng in
dust
ry (
Y)
Min
eral
indu
stry
(X)
Labor distribution
𝑉𝑀 𝑃𝐿𝑋 𝑉𝑀 𝑃𝐿𝑌
𝑤2𝑤2
𝐿2
Factor reallocation effect
Labor force moves from the manufacturing industry, so the industry lacks for labor
Cost of labor increases for manufacturing industry So, this effect squeezes profitability and output of
the manufacturing industry Decreased global competitiveness of manufacturing
sector due to high domestic input prices In some cases, foreign producers may enter the
market and drive down prices to level where domestic producers cannot compete
Effects of resource curse: practical implications
Market effect Exchange rate appreciation Price volatility, discouraged
FDI Demand for labor, capital,
goods Deflected entrepreneurial
activityGovernment spending Social programs
Political Rent-seeking and
corruption
Social Capital Formation Savings False sense of security High inequality Change in economic
incentives of individuals
Effect on wealth creation: Change in economic incentives of individuals
industry's growth is usually limited by the availability of the resource
(size, rate of usage)
cannot be expanded by having resources being put into it
Gain a share of the wealth of booming sector: Engage in entrepreneurial
activity in other sectors
Competing for a larger share of a pie of fixed size
Symptoms and diagnosis
Mineral wealth’s correlation with: Appreciation of the real exchange rate Civil wars Low economic diversification/growth Authoritarianism/poor governance & weak
institutions High inequality
Dutch Disease: Impact on International trade and competitiveness
International Competitiveness
Analyzing of macroeconomic performanceExplaining of international trade trends
Main factors: technological innovation degree of product specialization the quality of the products involved, or the value of after-sales service high rates of productivity growth
Measures of international competitiveness
Difficult to measureNo unique approach
Criteria:1. Cover all sectors2. Encompass all the markets3. Fully comparable internationally data
Measures of international competitiveness
1. Import Competitiveness (IC)
2. Export Competitiveness (EC)
3. Overall CompetitivenessEC* + IC*
4. INTERLINK Model explains changes in countries’ changing in exports
Diseased countries
Nigeria Azerbaijan Russia
NorwayBotswanaVS
Nigeria
First oil found in 1956 by The Shell D’Arcy
Nigeria: 1960-1970
GDP
Employment
Agriculture
72%
54%
Total Export Earnings 51%
Nigeria: since 1970
GDP
Employment
Oil
70%
54%
Total Export Earnings 91%
10%
Agriculture
Nigeria: problems
Huge external debt High unemployment Overdependence on oil
Huge public expenditures Corruption Money wasted
Russia
Ratio of Hydrocarbon Exports to Gross Domestic Product, 1992–2005
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
GDP, billions of rubles 1196 1092 953 914 881 893 846 900 990 1041 1090 1169 1253 1334Total Export, , billions of rubles, including: 745 417 265 268 230 221 264 389 436 384 384 411 433 469
Hydrocarbons 305 151 88 88 85 84 85 142 201 177 179 199 213 260
- Crude oil 130 65 37 38 35 32 31 65 96 85 92 107 126 146
- Refined oil products 63 26 14 14 17 16 13 25 42 32 36 38 41 59
- Natural gas 111 60 37 35 33 36 41 52 63 60 50 54 46 55 Other products and services 440 266 177 180 145 137 179 247 235 207 205 212 220 209Share of hydrocarbons in export, % 40.9 36.2 33.2 32.8 37.0 38.0 32.2 36.5 46.1 46.1 46.6 48.4 49.2 55.4Ratio of hydrocarbons export to GDP, % 25.5 13.8 9.2 9.6 9.6 9.4 10.0 15.8 20.3 17.0 16.4 17.0 17.0 19.5Yearly average prices of UK Brent grade oil, dollars per barrel
actual 19.4 17 15.8 17.1 20.5 19.1 12.7 17.7 28.3 24.4 25 28.9 38.3 54.4comparable (in 2005 prices) 27 23 20.9 21.9 25.5 23.3 15.2 20.8 32.1 26.9 27.1 30.6 39.6 54.4
1991-1998 Russian manufacturing industry: -56% Machine building and metalworking: -64% Timber, woodworking, paper industry: -66% Building materials: -70% Light industry: -89% Food processing: -47% Crude oil output: -32% Gas output: -15%
Russia
As a result, additional hydrocarbon resources were freed up for export. Thus, Russia experienced the onset of the “Dutch disease” in 1992–1998.
Russia
Fig. 2 Investment level and oil price. Source: Yudaeva et al. (2004)
0
5
10
15
20
25
30
35
40
01.9
6
04.9
6
07.9
6
10.9
6
01.9
7
04.9
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07.9
7
10.9
7
01.9
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04.9
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07.9
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10.9
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10.9
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01.0
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07.0
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10.0
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01.0
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04.0
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70
80
90
100
110
120
130
Oil price, $/bar (left scale) Gross f ixed investment index, SA (right scale)
Symptoms of Dutch Disease since 2005
Growth of oil sector GDP with declining growth of non-oil tradable sector
Growth of oil sector share in economy Sharp government expenditure growth and especially
growth of investments in non-tradable sector
time
oil
Azerbaijan
GDP dynamics and structure
Azerbaijan
Labor force No significant movement of labour force to the oil sector
As a result no “resource movement effect” – characterized as a symptom of Dutch Disease
Azerbaijan
Government investments
Dramatic investments in non-tradable sector since 2005
Money come from the oil sector
“Spending effect” – symptom of the Dutch Disease
Azerbaijan
Norway
First oil found in 1969 Before oil:
The poorest Scandinavian country Slow growth
Norway
Norway and oil discovery
No harm to non-oil sectors Economical development Used government policies to avoid DD
Norway’s policies to avoid DD
Pay back foreign debts when possible Invest abroad Encourage domestic accumulation of instead of using foreign
specialists Channel resources into education, research and development Put emphasis on knowledge, technological progress, and
human capital Stimulate female participation in the labor market
BOTSWANAEVIDENCE & EXPLANATION OF EXCEPTIONALISM
Sustained economic growth and socio-economic development since 1966
Mineral wealth Good macro-economic
management Good governance and
institutions
Evidence 1: Sustained economic growth since 1967
1966, independence
• Among the poorest states
• GDP per capita – US $ 283
1966 -1999
• Highest economic growth rate in the world
2007
• GDP per capita – US $13,600
• Status of upper middle economy
Evidence 2: Sustained socio-economic development
1966, independence
• 12 km of paved roads
• Life expectancy at birth – 50 years
• Adult literacy rate: 34%
1966 -1999
• HDI : 0.509
• Peace & stability
2007
• Developed road network, 6000 km paved
• Life expectancy – 68 years
• Adult literacy rate: 81%
• HDI : 0, 694
Explanation 1: Mineral wealth - diamonds
1966, independence
• GDP:
• Agriculture – 40 %
• Mining – 1,6 %
• Export earnings:
• Mining – 1 %
1966 -1999
• GDP:• Mining – 51 %
• Export earnings:
• Mining – 75 % (1989)
2007
• GDP:
• Mining – 35 %• Export
earnings:• Mining – 89 %
Explanation 2: Good macro-economic management
Successful in utilizing the financial capital from mining to drive and sustain economic growth and development.
Popular explanation: country’s sound macro-economic objectives and policies
Explanation 2
Two objectives adopted very early:
Avoidance of external debt and stabilization of government expenditure
Management of the exchange rate in order to promote economic diversification
Explanation 3: Good governance and institutions
A functioning constitutional multi-party democracy since 1966.
Enduring social and political stability
Free media
Quality and respected governance and watchdog institutions
ARE THERE STILL ANY RESOURCE CURSE SYMPTOMS?
Weak diversification despite efforts High unemployment (16-40%): low job creation capacity of diamond mining weak development of the non-mining private sector High inequality(Gini coefficient - 0.56, 1980-1998) Increasing expenditure on public consumption
(from 0.84 in 1995 to 1.08 in 2007).
Trends in economic sector shares, 1966-2005 (Based stats from Siphambe, 2007, p.3)
0
10
20
30
40
50
60
Year
%sh
are
of G
DP
Agric
Mining
Manufacturing
Trade, hotels & restaurants
Banks, insurance & busserv
General government
Anyway, Botswana has so far largely succeededin fighting resource curse
Geographic isolation – landlocked deep into the interior of Southern Africa
Drought proneness, soil infertility agricultural development challenging
Small domestic market SACU free trade area membership HIV/AIDS
COMPOUNDING FACTORS
Any treatments for “Dutch Disease”?
Primary concern of financial institutions (World Bank/IMF): “Democratic, consensual and transparent
processes” (Stiglitz) Anti-corruption programs Assistance of Western governments Stabilization funds
I. Slowing the appreciation of the real exchange rate
1. Sterilize the boom revenues:• save some of the revenues abroad in special funds• create a stable revenue stream• save some of the revenues for future generations (hard in
developing countries)
2. Increase saving in the economy in order to reduce large capital inflows • Encourage individuals and firms to save more (reducing income
and profit taxes)• Increase Saving - reduce need for loans to finance government
deficits and FDI
Any treatments for “Dutch Disease”?
Sovereign wealth funds
The Government Pension Fund in Norway The Stabilization Fund of the Russian
Federation State Oil Fund of Azerbaijan Future Generations Fund of the State of Kuwait
II. Boosting the competitiveness of the manufacturing sector Investing in education and infrastructure
BUT NOT PROTECTIONISM!
selling rights to natural resources, subsidizing other industries imposing tariffs on imported goods
Any treatments for “Dutch Disease”?
Natural resources: curse or blessing?
Conclusion
References1. Booming sector and Dutch Disease Economics: Survey and Consolidation, W.M. Cordon, Oxford Economic Papers, 1984 2. Boom and gloom. Azerbaijan's economy, drunk on oil, is suffering rapid - inflation, The Economist, 2007 3. “Diagnosing Dutch disease: Does Russia have the symptoms?”, Oomes N., Kalcheva K. (2007) International Monetary Fund4. “Dutch disease and Azerbaijan economy”, Hasanov F., Econimics Education and Resource Consortium , Baku, 20105. DOUBLE DIAMONDS, REAL DIAMONDS: BOTSWANA’S NATIONAL COMPETITIVENESS6. Jay van Wyk, Pittsburg State University, Academy of Marketing Studies Journal, Volume 14, Number 2, 20107. Escaping the Natural Resource Curse and the Dutch Disease’, Larsen, E., 200, Statistics Norway, Research Department,
Discussion Papers No. 3778. Impact of Government Expenditure on Growth: The Case of Azerbaijan, Koeda J., Kramarenko V. , IMF Middle East and Central
Asia Department, 20089. Indicators of international competitiveness: conceptual aspects and evaluation,” Durand M., Giorno C. (2008) , Organisation
for Economic Co-operation and Development (OECD)10. Lessons from the Dutch Disease: Causes, Treatment, and Cures’, Gylfason, T., 2001, Institute of Economic Studies11. Nigeria: Petroleum Revenue Management, PREM Sector Unit, Sub-Saharan Africa region’, Washington DC, World Bank, 2004,12. The Primary Sectors of the Economy and the Dutch Disease in Nigeria’, Olusi, J., Olagunju, M., 2005, The Pakistan Development
Review, Vol. 44 : 2,pp. 159–17513. The Dutch disease in Russia: Macroeconomic and structural aspects,Problems of Economic Transition, Fetisov G. (2007) Vol.
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COMPETITIVENESS OR EXPORT STRUCTURE?, S. Brakman, C. J. Jepma and S. K. Kuipers, DE ECONOMIST, Volume 130, Number 3, 360-380
15. Trade in Minerals, Graham A. Davis, Division of Economics and Business,Colorado School of Mines, December 15, 2009