The Case of the Dutch Disease

The thing about paradoxes is that their seemingly absurd nature creates an immediate facade for itself in your mind the instant you read it but upon closer and fine interrogation they turn out to be true. Now consider a communal understanding. It is common knowledge that in today’s economic driven world, resources are worth dying and killing for.

Why is this though?

A simple answer: Resources determine a country’s power and its hold over other countries. Resources are key ingredients for progress, growth and a say in matters at hand. Now consider this statement: A country with abundance of natural resources, especially point-source nonrenewable resources tend to have less economic growth and worse development outcomes than countries lacking.

Seems bizarre?

Well it isn’t quite so.

On intricate study of one particular group of countries, it can be made abundantly clear that this is indeed the Paradox of Plenty. One word: OPEC. For those unaware, this is the chunk of countries that have, quite fatefully I might add, found abundance of oil at their disposal. Oil and petroleum exporting countries have always found themselves on the brink of civil war, warding off corporations, fighting invasion, loot of oil and opting for nationalization of their oil refineries. In 1973, OPEC established an oil embargo in retaliation of the US and Western European support of Israel in the Yom Kippur War and a lifting of that embargo resulted in the oil prices escalating from $3 a barrel to a whopping $12 a barrel. This resulted in an inflow of revenue to OPEC. What should have been a way to use this influx of revenue through oil exports to improve other sectors of economy, only ended up degrading the rate of economic progress.

A usual explanation for this is considered to be the Dutch Disease, coined after the hardships that befell Netherlands after it chanced upon North Sea gas. According to this when a country strikes hydrocarbons, an inflow of dollar denominated revenue often leads to an exponential escalation of the domestic currency. This sudden interest of the world in your oil sector renders your other paramount sectors such as the agriculture and manufacturing less competitive, thus leaving oil to trudge the economy forward.

It can often be noticed that such economies measure relatively less on UN HDI factors such as child mortality and sex ratio.

Why so?

Economics has some answers to offer.  Unlike agriculture, the oil sector employs few unskilled workers. As an economy relies on this sector, it often faces unemployment, inequality and volatility in commodity prices; it is not the rich but the abundant poor who are the worst hit.  And as the resources are concentrated in the hands of the high and the mighty, the distribution of wealth is also screwed up.


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