Curing Dutch disease

Blog | 12 December 2016

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Could one possibly accuse the UK economy of Dutch disease? Helmut Reisen thinks that Brexit has highlighted quite an infection.

Writing in The Globalist on 1 November 2016, he observed, “The term ‘Dutch disease’ indicates that the risk of low growth due to resource dependence can apply to rich countries as well. The term describes the decline of the manufacturing sector in the Netherlands after the discovery of large gas fields in 1959. As regards the UK, the “Finance Curse” produces similar effects, often for similar reasons. Beyond a certain point, a growing financial sector can do more harm than good.”

When the Economist first coined the term in 1977, it explained how reliance on a single sector (in this case gas) can lead to  to distortions in the economy elsewhere and an overvalued currency. 

This condition is in evidence not just in North Europe, but in Africa. There, two countries serve as a salutary tale on what can go wrong and where sensible planning can put a stop the disease.

Angola

Who would guess that Luanda, Angola’s capital city, is the most expensive city in the world for expatriates? This puzzling superlative could well be linked to oil’s skewed effect on the country’s economy (see TFR’s country focus on Angola here). With the civil war over by 2002, subsequent oil revenues drove Angola’s impressive economic growth rates. But the Dutch disease tainted this new Angolan oil money. The government had spent it on mismanaged public projects, with resulting inefficiencies costing 5% of the country’s annual GDP. Oil-driven financial largesse has come at a cost: life is almost unchanged for Angolans living in city slums or rural areas. The disease has taken a hold on the currency. Angolan oil exports pull dollars into the country, appreciating the national currency. With an inflated domestic currency, previously unimaginable imports now become possible. Importing expensive overseas food has contributed to Luanda’s pricey reputation among expats. Failure to tackle Angola’s very own “Dutch disease” leaves their government exposed. As of 2014, oil accounts for 97% of exports and almost 80% of state revenues. This patient shows no signs of recovery.

Uganda

Uganda faces the same potential exposure to the “Dutch disease”. Ben Shepherd’s analysis, ‘Oil in Uganda, International lessons for success’ makes the point, “Drawing lessons from the experiences of other oil-producing states is to broaden the idea of ‘governance’, away from arid technicalities towards a more rounded understanding of the social, political and economic dynamics that may be most important in successful resource management. Once identified, these dynamics would provide a real-world context for an informed discussion of the policy options open to Uganda.”

He went on to note that Norway, Chile, Botwana and Indonesia are “often cited as countries that have been able to exploit their natural resources sustainably and to the benefit of all”. Four broad points of commonality are, he said, “A widely shared commitment to stability and growth, a capable and empowered cadre of technical advisers and specialists, strong social constituencies able to moderate and inform political debate, and widespread popular buy-in to spending priorities.”

In other words, economic realignment needs to work within the existing limited domestic infrastructure.  

UK contagion

A Barclays Trade Index report in April 2016 (before the EU referendum vote) revealed that financial services was the UK’s fastest growing export is financial services and that while the government export target of £1trn by 2020 looked unlikely, it might be doable by 2026. But – half of that would be from financial services.

Reliance on the financial sector, moribund manufacturing and overvalued sterling before 23 June 2016 may have all been factors in sterling’s post referendum 20% depreciation. However, if the depreciated GBP is here to stay, is there an opportunity for domestic realignment?

Nicholas Stone is a senior conference producer for ARK Events

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SPONSORED CONTENT: TFR’s Cross-border trade forum Europe on 9 March 2017 explores and evaluates hydrocarbon diversification, as a possible treatment for the “Dutch disease”. Politically driven trade realignment, technological disruption and on the ground real life trade deals complete the day long forum agenda.

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