1. Introduction
Dutch disease is a theorem which is first developed by W. Max Corden and J. Peter Neary in 1982 based on a theoretical story explaining the relationship between tradable and non-tradable goods. The theory basically claims that a large amount of resources gained through exploitation of natural resources or through an international aid or in any other similar way resulting abundance of financial resources for a country might not help the country to create an economic development. This country will enjoy spending this abundant resource, however, spending the resource will not create a capacity to produce some other tradable goods and export them to the other countries, on the contrary, the country might more concentrate on exploitation of the natural resource or on the item that provides abundant of financial resources to the country. Subsequently, the country cannot establish a functioning economic structure for an economically sustainable developing economy.
Dutch disease provides an important result: “There is no certain positive relation between abundance of financial resources available in a country and economic development”. Subsequently, we can claim that international aid provided for less developed countries do not help them develop their economies and have an economic development.
Many examples for the relation between financial resources and economic development can be given. Discovery of natural resources in a less developed country, international aid to a less developed country, foreign direct investment transfers to a developing country, or short term international fund transfer to a developing country cases show us that higher volume of resource does not guarantee economic development. On the contrary, the developed countries are specialized at using other countries' natural resources. We see that they import raw materials at a cheaper prices and transform raw materials to goods and export them at a higher price levels. They always create an advantage in the international trade.
2. Dutch Diseases Examples and Implications in terms of Economic Development
In this section of the essay, the definition of Dutch disease will be given and some examples of Dutch diseases will be summarized. I will evaluate the examples and try to show how higher amount of financial resources do not help countries develop their economies, on the contrary, how it damages the economic structures and causes more economic problems. At the last of part of this section, I will try to develop an understanding of how to manage Dutch disease cases to provide an economic development for countries.
2.1 What is Dutch Disease?
Dutch disease explains the relationship between a increase in the exploitation of the natural resources in a country and a decline in the manufacturing or agricultural production (Bjordland and Thorsrud, 2013). When a country starts higher level of exploitation of its natural resources or any other way such as international aid or capital flows into this country, it receives higher level of financial resources in the country. That causes a valuation in the national currency and the goods produced in this country become more expensive relatively, and the country loses its power in the international trade. Any change causing a large inflow of foreign currency into country might end up with a similar result. Dutch disease occurs because these countries do not have a strong set up for exports and the country mostly more concentrate on the booming sector causing the large inflow of foreign currency into the country and cannot create policy respond to this change.
Dutch disease does not only occur in the less developed countries, it might also influence more developed economies such as the Netherlands, Norway, or any other developed European country. We can see this disease at the earliest times when new silver reserves were found in the U.S. and some states have suffered from these discoveries in 1870s. According to the Coinage Act of 1873, the money supply was decreased and the interest rates increased. This situation created a huge amount of debt on the producers (Friedman, 1990) and their agricultural production declined. Even some economists think that was the beginning of the Great Depression in the U.S.. Furthermore, the age of Mercantilism provides many stories about the first traces of Dutch disease. During this age, many European countries had tried to collect many valuable resources from the far countries through campaigns supported and protected by king families. The merchants who invested in campaigns had brought valuable mines and other valuable objects to their countries, however, that caused an inflationary environment in the main countries. Until the industrial revolution, countries could figure out how to use these resources.
2.2 Some Facts and Evidences Dealing with Less Developed Countries
After 1990s, the international community has more focused on poverty reduction in the low income countries (LIC) and Official Development Assistance (ODA) funds have been provided by some international institutions. ODA funds have created an environment for LICs with more opportunities in terms of preparing strategies to fight poverty and the governments could increase their spendings. However the effects like Dutch disease decreased the effectiveness of the ODA funds. Tsikata (1999), Hansen and Tarp (2000), Younger (1992), Johansson (1994), Vos (1998), Nyoni (1998) analyze the effects of the ODA funds on the economic development and they find different results. However, most of them indicate Dutch disease effect as a negative influence through a real exchange rate mechanism in the LICs.
ODA funds mainly aims at supporting infrastructure and developing human capital in the LICs. Also countries can use these resources to provide important machinery and technology to be imported easily. The management of implementing these strategies have been led by the governments. These governments have a capacity of management and implementing development strategies.
The economists have discussed whether the ODA funds have contributed to the LICs. Some economists believe that the ODA funds have contributed to these countries, because they have had a potential which has not been used before. According to the diminishing marginal returns rule, these countries have just started using their potentials and it has been expected that by the use of international aid they would create a positive development (Hadjimicheal et. al., 1995; Lesink and White, 2001). Some other economists claim that under certain conditions, the ODA funds might contribute to the countries (Dalgaard and Hansen, 2001). According to Dalgaard and Hansen (2001), a country with well established governmental services can succeed developing strategies and use aid to develop human capital. However, if this condition is not satisfied, the government might misuse the resources and spending aimlessly might create Dutch disease effect and some other negative effects.
The World Bank provides an important study to the researchers: the World Bank Country Policy and Institutional Assessment (CPIA). This assessment basically takes some macroeconomic variables and shows the difference between pre-aid term and after-aid term. The results indicate us that the diminishing returns work for the ODA funds and the eminent question is how fast diminishing return starts working. According to this assessment, even the countries with successful governments might not get enough contribution from the ODA funds.
2.3 Some Country Cases
Same (2008) analyzes the Equatorial Guinea where 95% of all the GNP depends on oil production. Same finds that the oil production in the country creates Dutch disease effect on the economy and the oil production crowds out other sectors in the country. Same (2008) has interesting claims of that the country is required to have Dutch disease to settle down its economic structure. After this phase, the country will develop an economic structure and the rich natural resources will provide new opportunities for the country. This claim can be tested in the future.
Charlier and N'Cho-Oguie (2009) compares some implications from Cameroon, Indonesia, and Nigeria on Dutch disease effect in these countries. Indonesia could manage to avoid Dutch disease with well-developed economic policies in the country. Especially, microfinance reform has provided a good background for the country to use the international aid effectively in the country. The statistics show that the development in Indonesia in terms of effectiveness, the Indonesian government has become more successful than the neighboring countries including India. The most eminent factor behind this country's success was the flexibility in policy making and changing. The government has tried to create policies to alleviate the poverty in the country and after each system crisis in the country; they could develop a remedy policy. The Indonesian governments, after1980s, have consistently continued these policies.
On the contrary to Indonesia, Nigeria and Cameroon have failed and they have suffered Dutch disease. At the beginning of the exploitation of the natural resources, both of the countries could manage to develop their agriculture and manufacturing industries, however, after a while the national currencies were overvalued and in a short time, they have started suffering from the imbalance in their international trade. In 1986, Nigeria has started some reforms to avoid Dutch disease effects, however, because of some structural errors in their reform program, they have had a failure (Ezeala-Harrison, 1993).
2.4 General Problems the Countries Receiving International Aid in Terms of Providing Economic Development
There are many LICs on the world and some developed countries are trying to support the economic development of these countries. Some funds have been provided by the support of the developed countries to the LICs. However, the financial resources provided to a LIC do not guarantee the economic development. The cultural background of the country, the consumption attitudes in the country, the quality of the human resources in the country and the quality of the governmental organization in the country determines the success in the use of international aid for economic development.
If the country is aware of its situation and the economic development is demanded by the people in the country, then it is more possible this country to be successful. A country desiring economic development uses these funds to develop infrastructures for industries and human resources to increase high quality labor force. Thus, the country can start its own production plants and create more economic and tradable goods for development. By following a way like this, the country will start increasing the income at national level and at individual level. If the country does not prefer this way, that means the country spends the financial resources on the unproductive goods and services such as restaurants that some people with high income can access or luxury imports for some people in the country. We observe that some LICs have a more dictatorship structures and mostly these countries use international aid funds for the members of the king family or for a small group of managers in the country. Even there is no dictatorship or king family in the country, if the resources are used on unproductive items, then this country will fail to provide an economic development for the countries. However, there is no certain data that all the dictatorship countries fail to provide economic development or in another word democratic regimes are more successful in terms of economic development. Consequently, the success in economic development depends on how a country is managed, not on what kind of political regime is on power in the country. Also the LICs are more fragile relatively when they face poverty and the regime kind does not matter in terms of economic development (Przeworski, n.d.).
Another important fact in the economic development is to create an economic environment allowing every citizen to have equal opportunities, therefore, while the income increases at national level, every citizen might have equal opportunities to have better life conditions and start their own businesses. If the country cannot provide the equal opportunity for everybody, the country might still continue its economic growth; however, it does not necessarily provide an economic development because economic development means the welfare of people.
Also the LICs which could prepare a better strategic plan have become more successful. Mostly, the international institutions or some developed countries have provided technical assistance to some LICs to prepare some strategic plans. If a LIC could create a potential to implement these strategic development plans, we observe that it is more possible that this country could succeed.
The international funds provided for the LICs are like a cure and if it is used properly for the economic development, they can contribute a lot to the LICs. If we think simple, applying a medicine for stomach cannot contribute to health when it is applied to any other part of body or for any other goal.
Consequently, an LIC desiring economic development should be able to create a culture among its people and in its governmental organization to support this. Otherwise, even providing larger amounts of financial resources to the country will not contribute to the economic development.
2.5 How to avoid Dutch Disease?
Each country might have some important opportunities to develop its economy and rich natural resources or international aid programs are two of them. Some countries can use these opportunities and they are classified as developed countries. So the thing we need to understand what differences exist between countries and some of them become successful while others fail.
The most eminent factor is the organization and human resource quality in a country. If a country can develop a good government organization by hiring high quality workers, this government can use the opportunities. We see many examples of this in the history. The U.S. citizens are all immigrants from all over the world, and these people have shown that they can be competitive and they can be entrepreneurs. We can claim the same good factors for Germany. Germans, after WW II, have rebuilt their countries in a short time by using the aid from the U.S.. Because Germans could develop an governmental organization and the German citizens took responsibility at their businesses. Even Germany have received some workers from less developed countries like Turkey and these lss quality workers have played an important role in the production plants. Consequently, the countries aiming economic development should be able to create some mechanisms to grow higher quality labor force, managers, and government workers.
Countries also should be able to develop an economic development strategy and instead of spending the resources on the non-traded goods, they should develop some industries which have the potential to be engine in the economic development. This strategic plan should include many dimensions such as human resources policy, technology transfer and development policy, export and import policies etc..
As we know Dutch disease causes some monetary problems also. To avoid these negative effects, a country can create some monetary policy responses. Basically, to avoid an overvalued national currency, they might implement anti-inflationary policies, however, that requires that citizens control their individual spending and corruptions in government sector has to be prevented.
Another important strategy the LICs should follow is to create an economic environment for developing some necessary industries such manufacturing, education and other important sectors which positively influence the economic development. Dutch disease effect might kill these industries and an LIC might not develop the necessary industries in the country. The financial resources should be used to develop infrastructure for these industries and therefore these industries do not fight the bad conditions due to lack of infrastructure.
After providing a suitable environment for the important sectors, an LIC should concentrate on diversification of the goods and services in the economy. This strategy will help the country make its exporting stronger. Countries also should work creating industry clusters, thus the industries can support each other by producing necessary goods and services for each other. Clusters also will make a large contribution to develop human resources. Clusters are important for any economy desiring economic development.
Education and training institutions also play an important role in the economic development. The LICs should create better education and training opportunities for their citizens. Also universities can create a scientific environment in the country to create knowledge or at least to transfer technologies from other countries.
If all the conditions are provided for a proper use of the financial resources available, an LIC country should be able to continue a political and an economical stability in the country. The economic policies and other development related policies should be able to be implemented insistently and the governments should avoid any populist approach. Populist approaches mostly are in favor of making public happy for short terms, however, they do not contribute the economic development in the long run.
3. Conclusion
The studies on Dutch disease show us that large amount of available financial or natural resources do not create trouble for countries, actually, how a country spends these resource might cause some problems in terms of economic development.
The less developed countries mostly suffer from not being able to create an effective government organization and they face many corruptions. At the background, that is a result of not having high quality of workers in the country. Subsequently, country cannot have good quality managers and without managers and good workers, it is almost impossible to develop any organization. Examining the developing countries gives us a result indicating that successful countries could always manage to create an education system to develop human capital in the country. For example, Indonesia case shows that the implementation of microfinance system has contributed to the economic development by increasing the number of producers and entrepreneurs. With small finance opportunities, poor people could be able to afford to create their business and the most interesting result is that they could repay their debts to the banks. At the same time period, India has had more resource comparative to Indonesia, however, there is a still social conflict in India and that prevents a better development in the Indian economy.
The worst thing a country with a large amount of natural resources might face is misuse of the natural resource and no economic development are not succeeded. The countries in the gulf region is not away from the worst scenario. Some rich families in these countries receives almost all of the GNP and most of the public is poor. Most of the investors in these countries is from the rich families or foreigners. They could not develop a manufacturing industry and even they import basic foods from the other countries. Because of the climate and geographic reasons, they do not have the opportunity for an agricultural industry. Gathering all these disadvantages, we can claim that after the end of the oil age, these countries will suffer from the poverty. Unfortunately, it seems difficult for these countries to develop their economies because of their political system. Recently, the Arabic Spring movements also have made the situation worse in these countries.
The Latin American countries also faces economic development problems, although they a large amount of natural resources. After 1980s, some Latin American countries have tried to implement some economic development strategies, however only a few of them could be somehow successful. These countries also suffers from political instability.
The African countries are a different case in terms of economic development. Recently, many foreigner investors are doing large investments in the African countries. For example, Sudan has received large investments from China and some other developed European countries. As known, Sudan seems to have large amount of oil reserves and it looks like Sudan has the potential to be next Saudi Arabia. The development strategy of the Sudanese government is to invite investors from the developed countries. Thus, instead of developing their industries, they have preferred to allow foreigners to develop their industries. Even we observe that the Chinese companies are purchasing large fields in Sudan for agricultural production. The time will show us whether the model of hiring foreigner investors to utilize the natural resource will work or not.
Consequently, Dutch disease is not exactly a disease. It is a crisis and with a good crisis management, it might be transformed to economic development. There are some countries which could do this, therefore we can claim that all the countries can manage this by creating proper conditions.
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