The Dutch Disease and The Diversification of An Economy: Some Case Studies
The Dutch Disease and The Diversification of An Economy: Some Case Studies
The Dutch Disease and The Diversification of An Economy: Some Case Studies
Abstract: An economy that does not seek and prepare to diversify, can equally be ready to crunch. Nations of
the world have been endowed with mineral resources differently, which is why they cannot live in isolation. The
argument as to whether primary resources rich nations of the world do better in economic activities or not, is a
matter of whether there is diversification of their economies or not. Lack of diversification of their economies
results from monoculture economic conditions. A number of countries have suffered from such crises emanating
from the exploitation and development of single sectors of their economies. Part one of this work is the
conceptualization of economic diversification. Development of the idea of the Dutch Disease(DD) is the part
two of this work. The part three is contextualizing the DD. While, cases of the DD analysis forms our part four.
The conclusion is part five which is the final section of this work.
I. Introduction: Background
Diversification which is all about the exploitation and development of various sectors of an economy if
not all sectors, has been a major route through which many developed countries of the world passed. The
discovery of certain primary materials or resources however, often change the mentality of such nations into the
problem of non-diversification. The blockage to diversification comes as a result of sudden rise in revenue of
such affected nations whose riches from natural resources or otherwise it‟s abundance, rather take them several
years backward by killing their economies. In place of diversification, leaders are rather induced into corruption
and wasteful spending, thereby, creating a declining economic activities, weak investments, nonchalant attitude
towards reinvesting the excess income from their booming single sector. In the case of Nigeria for instance,
Obasanjo(1992:2) explained that;
While Indonesia had oil in part to finance its investment in agricultural development and to use it as
jump of leverage, Malaysia was not blessed with the same gift of nature. Yet the story has been told so
often of how Malaysia came in the sixties to collect palm oil seedlings from Nigeria. The irony of it is
that while Malaysia is currently an exporter of palm oil, Nigeria is now an importer of palm oil and
importing from Malaysia.
This explains the story of declining agriculture in Nigeria as a result of concentration on a single sector
(oil) for everything. The situation became more and more difficult, when rising bills from imported food and
industrial machines that made Nigeria became more and more dependent on oil.
The danger of depending on a single sector began to manifest glaringly when Nigeria began to produce
less than 1 million barrels of petrol daily and sold it for about $30 per barrel as against an earlier 2.5 million
barrels per day in 1979 and at a tagged price of $40 per barrel(FGN1983). Many countries of the world has
suffered from similar situation due to dependence on single growing sectors‟.
The Dutch disease (DD) theory is therefore, a situation in which the discovery of primary mineral
resource anywhere in the world instead of boosting exploitation and harmonious development of the economy,
rather leads to decline or total collapse of economic activities in other sectors of their economies. This was the
situation in the Netherland where the discovery of a large natural gas reserve led to a decline in its industrial
base owing to inflationary pressure on the guilder.
The DD phenomenon created unemployment in the Netherland through a massive movement of
workers from the manufacturing sector to the booming gas sector for higher pay. This action later killed their
manufacturing sector. This problem did not only occurred in the Netherland, but it has occurred in so many
countries of the world with different perspectives or trends leading to various difficulties. For instance,
petroleum exporting countries failed into such situation especially with the occurrence of the petroleum booms
of the 1973 and 1979-80. They were caught off between affluence and resources management problems.
The concentration of economic activities on a single sector can only cause more hardship and take a
country several years backward. The government and/or leaders under excessive wealth and riches looses
bearing due to such sudden financial power and end up calculating ways to spend such accumulated wealth.
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The Dutch Disease And The Diversification Of An Economy: Some Case Studies.
The term Dutch Disease was first used in an English journal called the Economist on June 26,1977
Koutassila, (1998). It tried to describe a certain phenomenon known as the Hollandis Syndrome or the
Netherland Syndrome or simply the Dutch Disease Nowak, (1994). Again, Coussy, (1991:64) and Christine,
(2003) also called it the „ Hollandis sickness‟. The Dutch Disease existed long before the situation was actually
brought to light. For instance, the collapse of the manufacturing sector and the subsequent unemployment of the
Dutch economy was a clear case. Corden, (1984) explains that the abundance of gold in Australia, the growth of
capital in Swiss, the growth of gold in Spain and United States of America in the 16 th century are situations or
elements that constituted Dutch diseases. The fact is that countries often tend to experience serious declines in
the output of other sectors of their economies, whenever the discovery of a particular sector seem to imprint in
the minds of its citizens that the end has come for poverty on their land.
Thus, Al-Sabah, (1988) argued that „„the DD is not unique to oil and gas exporting countries alone.‟‟
The natural gas discoveries in the Netherlands in the 1960s led to an appreciation in the real exchange rate,
brought about not so much by an appreciation in the nominal wage increase ahead of that of West Germany,
but with the net result that her export industries were squeezed and a decline in Dutch manufacturing set in. The
boom in technologically advanced parts of Japan‟s manufacturing sector in the 1960s had adverse effects on the
less dynamic tradable sectors including agriculture. The boom in the export of Swiss bonds and money in the
1970s led to a real appreciation in the Swiss franc and had an adverse effect on traditional Swiss exports and
export competing industries.
A shift of labour from the other sectors will ensue and a contraction of tradable sector will result from
its reduced use of production factors due to the effect of resources movement Corden, (1982). The effects is
called the supply side effect of a boom. On the demand side effect of a boom, a primary material boom, leads to
increases in income at home and as such increased demand for all goods. The price of tradable is set on the
world markets, the boom‟s extra spending raises the prices of non-tradable goods, resulting in further
appreciation of the real exchange rate. Thus labour shifts from the tradable to the non-tradable sectors resulting
in a contraction in the non-booming tradable sectors which is the „spending effect‟.
During the 1970s, the guilder appreciated relatives to most currencies in Europe, thereby causing both
the textiles and clothing industries to almost vanish. This situation was caused by the movement of labour from
the manufacturing sector to booming sector (oil and gas). There was also a decline in metal manufacturing,
mechanical engineering, vehicles, ships, and even construction and building materials. The service sector
expanded noticeably, and seemed to be taking over from the other sector of the economy.
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The Dutch Disease And The Diversification Of An Economy: Some Case Studies.
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The Dutch Disease And The Diversification Of An Economy: Some Case Studies.
Kuwait
The potential difficulties in Kuwait that implicated the nation are the total dependence in exportation
of natural resources to the international market. The impact of petrol in Kuwait has led to certain movements in
real exchange rate and the relationship to the rate of sectoral inflation. Even before the invasion by Iraq in 1990,
the declining status of the economy showed that the devaluation of the currency was necessary and important
for major expansion in terms of industrial output Robert, (1991:1). The “pressure of petrol which had negative
effects on the industrial sector was difficult to avoid as a result of petroleum boom of 1973 to1974,” Bright,
(1990:395). She produced a lot of fish but was still on the decline compared with the petroleum sector‟s
activities. The result was an unharmonised development of the various sectors of the economy.
Mexico
The case of Mexico was associated with the privatisation of the “pemex petrochemicals” such that the
country enjoyed an expansion in petroleum export. The situation interrupted the growth of big investment
sectors for trade and to ameliorate the problem of unemployment. Thus, Auty, (1991:13) argued that;
Mexico’s oil windfall was advantageously later and smaller than that of most oil exporters, but it was
still absorbed too quickly. Inflation accelerated, the exchange rate appreciated and diversification into
competitive non-oil tradable like resources-based industry (RBI) was retarded.
The economists called it a set of distortions that soon afflicts a country that has just passed through an
oil-led expansion. The state of confusion, political in-fighting and public agitation in Mexico associated with
the privatisation of pemex petrochemical plants is either a strain of the DD or a new economic virus altogether.
The Dutch disease occurs as sudden economic expansion, fuelled by an oil boom, impact on structural
defects in economic and social infrastructure as well as industrial and environmental policies. Typically, too
much money comes into the economy too fast causing sudden inflation and other social and economic
distortions at the regional and national levels.
When the inevitable down-turn occurs in oil prices, the country is unprepared for the change in market
conditions. An economic crisis occurs as the currency and national expectations-are devalued. Too much RBI
investment was channelled through state enterprises-whose performance deteriorated. It relied heavily on the
protected domestic market and which inadequate revenues then made RBI vulnerable as Mexico rapidly
liberalized its economy in the late 1980s Auty, (1991). The general expectations in the oil exporting countries
were that then oil windfall would accelerate economic growth and speed healthy structural changes. But the
result was rather disappointing as political pressures for over rapid windfall absorption proved hard to resist.
Columbia
In Columbia, most of government efforts were concentrated on the prices of exports, instability of
revenue source to diversify the economy, decline in terms of trade, and the crisis of balance of payment leading
to the collapse of foreign market prices of primary materials. Some recent literatures on the Dutch disease such
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The Dutch Disease And The Diversification Of An Economy: Some Case Studies.
as Christine (2003) Emmanuel, (2005) Farooq, (2005) Joseph, (2004) suggested that some painful effects which
accompanied the exports of primary materials due to booms, especially in developing countries were simply,
DD.
The booming sector in Columbia was basically coffee and the export of drug realised in external trade.
The industrial development in Columbia was due to a system of protectionism by a strategy of import
substitution. The foreign earnings were basically from coffee export, 1961-1970. Total revenue in Columbia
showed that ¾ came from export, while internal production increased the export of non tradable goods Neary
and Wijubergen (1986), Edwards (1984).
The exchange rate of the country devaluated progressively while leading the export sector towards
being the strongest sector, given the system of tax, the absence of custom taxes on inputs and output. This event
was very efficient for Columbia. Therefore, in 1974, the contribution of coffee failed by 44% in terms of
exports, while the industrial sector rose by 8% in 1967 and to 28% in1974. The export of coffee increased
generally by 14.3% every year in real terms during the period, industrialization increased up to 27.1% in the
same year.
Generally, the DD in Columbia showed in terms of relative changes in prices which concerns tradable
goods and non tradable in the export sector. Hence, Columbia attained 60% export of coffee from the total
export of the country. Therefore, Columbian DD was predicted from boom in primary material exports which is
responsible for industrialization due to appreciation of a real exchange rate.
Kamas, (1986:1177). He summarised the symptoms of the Dutch Disease in Columbia to include:
1. Relative prices and exchange rate show that during the years of coffee boom, the relative price of home
goods rose substantially.
2. Sectoral output and exports in the theory of the DD predicts that primary export boom will shrink the size
of non-booming tradable goods sector through the rising relative prices of non-tradable goods and
through direct resource movement effects.
3. Non-booming exports show that there is a general slower growth rate in non-coffee exports (1975-1980).
The real value of exports other than coffee rose to 6.8% annually, compared with the 14.3% growth
during 1967-74. The manufacturing sector grew simultaneously with only 10.5% compared to 17.1% in
the booming sector. Thus, Sachs and Warner, (1995) concluded that „one of the surprising features of
modern economics growth is that economies abundant in natural resources have tended to grow slower
than economies without substantial natural resources‟.
Cameroon
In Cameroon, the effects of the rise in prices of petrole on the foreign exchange were the major
problem to the country that presented the DD. In 1982, oil represented only 58.5% of total exports, and 56.4%
in 1983. Even though, the agricultural sector was still diversifying, the rise or appreciation of its currency
through exports of oil created a DD situation in the country, Koutassilla, (1998:10-14). The statistical data used
in testing the reality of DD are different according to the methods of observation. Coussy, (1989) explains that
in West Africa, the result of the existence of the DD or its absence is non comparable because we treat neither
the concept of the syndrome nor the same happening by the instruments contracted to observe it. Three
approaches for the determination of the DD in the countries as used by Coussy, (1989:64-66) which are similar
to those of Nigeria, are:
1) The DD of adjustment by the rise in the nominal exchange rate;
2) The DD of adjustment by the rise in the general level of prices;
3) The DD of adjustment by the abolition of the restrictions to changes.
Congo
According to Koutassila, (1998:3) “the rise of petroleum prices in the last years of the 1970s and the
beginning of the 1980s, Congo‟s exports has been less than that of Cameroon.” This may be as a result of the
concentration on the traditional sector (agriculture), because, Cameroon gave greater attention to the
diversification of the traditional sector, than Congo, Cameroon was said to be free of a DD, but Congo was
implicated. Recent researches have confirmed the hypothesis that foreign revenue can be a mixed blessing
Utomi, (2003:2) and Stash, (2005). The almost inevitable appreciation of the real exchange rate leads to
contraction of the traditional sector‟s export and inflation in the non traded sector.
Côte D’ivoire
Côte d‟Ivoire is an open economy and segmented, which allows an analysis of the evolution of revenue
distribution in rising inflation regime. This showed that the real income of workers is less sensible to
accelerated inflation rate. The general aim of this theoretical analysis is to enable us understand if the coffee
boom in Côte d‟Ivoire could give birth to a DD phenomenon. In effect, the impact on foreign trade was noted in
terms of relative decline in supply of tradable goods and its direct repercussion on exports.
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The Dutch Disease And The Diversification Of An Economy: Some Case Studies.
In conclusion, the empirical studies show the reaction of Ivoirien economy to the booms of coffee and
cocoa which put light into the phenomenon. The country was rendered stronger from the structural adjustment
programme which Côte d‟Ivoire finally decided to operate a patronage of the World Bank. Nowak, (1994:51)
contended that;
In the case of Côte d’Ivoire, the country suffered from the symptoms of the DD due to the coffee and
cocoa booms of the late 1970s. Evidence on relative prices, growth of sectoral outputs and external
trade show that the demand shocks affected the economy in the manner predicted by the DD model.
The real exchange rate appreciated;
1) The size of non booming tradable goods sector shrunk when the non tradable sector grew faster;
2) The external accounts deteriorated owing to the decline in export of non booming traded goods and the
expansion of import.
Spain
According to Janvier and Antoni, (2005) the symptoms of Dutch Disease in Tourism such as Spain, are
commonly associated with the discovery and development of natural resources. It can occur when forces cause
a big shift in demand and high influx of foreign currency. Two Spanish regions, provides evidence that the
Balearics and the Canary Islands, whose economies are heavily oriented toward tourism, both show signs of DD
and the result is that their economic growth might be compromised in the future. But Van wintergreen, (1986),
Usui, (1996), and Laplagne, Treadgold and Baldury, (2001) show that external aid received by developing
countries tends to generate growth in consumption and an appreciation of the real exchange rate causing a
decline in national production and exports by the tradeable commodities.
Sâo Tome and Principe
The discovery of oil in Sâo Tomé e Principe territorial waters and the imminent prospect of a large
inflow of foreign exchange represent a huge windfall for the country but also present it with some
macroeconomic policy issues and problems which can, with foresight, be ameliorated and turned to the benefit
of the country in the long run Steven (2002).
Papua New Guinea
Papua New Guinea has since independence in 1975, pinned its hopes for economic development on its
extractive sector. It dismissed Dutch Disease in principle, but appreciating real exchange rate which is
considered to have import offsetting economic consequences via its implications for crime. According to
Satish, (2000:1) the country has extraordinary mineral wealth yet its rate of economic growth has lagged behind
that of other middle-income developing nations, especially compared to its neighbours in South-East Asia, and
its human resources has no sign of improvement.
As Corden and Neary, (1982) Corden, (1984), Rosenberg and Saavalianen, (1998); believed that, the
booming demand caused by higher wealth leads to shift of an economy‟s productive resources from the
tradeables sector to the non-tradeables sector. Such shrinkage of the tradeables sector is known as the Dutch
Disease, as it affected the Ducth manufacturing sector at the discovery of gas in the 1960s.
It is not a hidden fact that the above types of DD were the outcome of a booming petroleum activities
that greatly influenced the Nigerian economy. The government had given more of her attention to petroleum
industry as a way of raising heavy revenue, thereby neglecting other local industries that could have stimulated
faster development and in a harmonious manner. For example chemical industries which fabricate chemical
products and plastic materials for industrial uses have not taken off fully. It is believed that the painting
industry, the detergents plastic materials, and automobile have the right to substitute important primary products
for producing industrial chemicals for foreign exports. What was needed in Nigeria was sectoral diversification.
Henry, (1991) indicated that in the middle of 1980, Nigeria was the only country out of six countries
(Nigeria, Indonesia, Algeria, Iran, Venezuela, Trinidad and Tobago), who‟s level of life quality had fallen
below the shock level. The Nigerian economy was summarised into three:
1) The specific uses to which petroleum revenue was put into conditioned by the structure of socio political
sharing. The social interest and class contrast was low because the state was under pressure to render
services to the people which continued across military government to military government.
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The Dutch Disease And The Diversification Of An Economy: Some Case Studies.
2) There was no much pressure to use petroleum revenue to ameliorate agricultural sector productivity. This
is where Nigeria differs with Indonesia in the study. In Indonesia, petroleum revenue was used to
ameliorate agricultural sector: In Nigeria that was not done. Thus, Indonesia progressed, while Nigeria
languished.
3) Macroeconomic adjustment of Nigeria had a form of lowering of the national revenue and this differs
from other petroleum exporting countries. Indonesia adopted a rapid exchange rate between 1978 and
1980, in form of devaluation. Venezuela, Trinidad and Tobago experienced a large devaluation in 1981
without any hesitation on such adjustment.
Coussy, (1991:72) maintained that, While Cameroon on the other hand, seems to have escaped the DD.
The potential difficulties involved in relying on primary exports has been on the export prices and revenue
instability, declining terms of trade, and balance of payment crises resulting from the collapse of primary
exports market prices.
The Nobel Laureate, Joseph Stiglitz, (2003:1) stated that to ensure proper management of oil revenue,
leaders need to regard their country‟s national resources as the nation‟s endowment, that these resources ;
do not belong exclusively to the current government and generation, but to all citizens and
generations. The current government and generation are simply trustees. To use these resources for
ones own benefits, leaving future generations impoverished, is to steal their patrimony.
Management of revenue, however, has been widely observed in natural resource-rich developing
countries, commonly known as the “resource curse” countries as diverse as Nigeria, Iran, and Venezuela have
fallen victims to their own prosperity. Oil-rich developing countries have consistently under-performed, as
compared to resource poor developing countries, in the field of human development, economic growth, human
rights, democratic governance, and conflict prevention. In the same way, Utomi, (2003:1) Argued that every oil
windfall has created policy shocks that have increased uncertainty and resulted in retrenchment rather than real
growth of the Nigerian economy. That;
The Yom Kippur War windfall of 1973 facilitated the Udoji awards and the damage to the consumption
ethic of Nigerians, which hunts us today. The Iranian revolution windfall of 1979/80 sets us up for
Dutch disease after DD as expanding budget begot the open. General Licenses for imports that led us
down the part of debt crisis. The ultimate was 199 windfall following the Gulf War which increased
our recklessness so much that in the year of that windfall we ended up with perhaps the worst deficit
we had up to that point, creating the inflationary pressures that did havoc to real incomes.
The dramatic Arab embargo of October 1973, which quadrupled world oil prices, set in motion a chain
of events that was to have a great impact on the economies of virtually all countries, industrialized and
developing, oil-importing and oil-exporting. Relevant questions in the case of Nigeria are:
1. How important were the oil windfalls to developing exporters?
2. Did these countries merely consume their terms of trade gains?
3. If not, what strategies did they formulate for using their new wealth to promote growth and development?
4. Did they enhance well-being and raise consumption?
5. Or did the difficulties of managing producer economics through volatile, poorly predicted terms of trade
shifts nullify the potential gains, perhaps even turning it into a net loss?
6. Is it infact possible for a country receiving a large windfall gain to end up less well-off than it might have
been without it?
7. What lesson can be learned from these countries experiences?
An investigation of the mineral boom in Satish, (2001) Iheanyi and Walker (1990), in their works, the
impact and prospects of oil wealth in an open monocultural economy: Nigeria, a case study of oil shares of
Nigerias total export earnings, 1980-87, shown below:
some countries seem to fit the DD prediction, such as Bolivia, Nigeria, DR Congo, and Zambia. Others like
Chile and South Africa, seems to contradict the DD hypothesis. Therefore the real worlds of rich-mining
countries seem to be more diversified than what the DD theory predicts.
V. Conclusion
The characteristics of developed nations and underdeveloped ones are different, particularly when
talking of development indicators. The peculiarity of the Dutch disease in this case is that most nations both
developed and underdeveloped are often caught off with the flair to concentrate on the exploitation and
development of their booming sector of the economy singularly. The rise in revenue always go with the desire
to increase or expand spending but not for diversification. Consumption rises and investment declines. Other
variables in the economy tend to be affected negatively. For instance, at the initial stage, the local currency will
appreciate rapidly and depreciate greatly at a later date.
In addition to the above problem, unemployment will rise due to movement of labour from the
dwindling sectors to the growing single sector. This development tends to kill other sectors of the economy.
therefore, the need to diversify an economy cannot be overemphasised.
A diversified economy increases investment in the economy as more and more sectors of the economy
are brought into focus with widening economic activities. Thus, the discovery of a primary materials should not
be seen as a means to abandoned other relevant and important sectors of the economy as it happened in the case
of those countries analysed in this work.
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