Economic development spheres of society are associated with ups and downs, booms and crises. One of the essential signs of regression or stagnation in the country's economy is considered a Dutch disease.
Definition of a concept
From the term it is clear that he received his designation from the name of the country. True, Holland is an unofficial name for a state. The Netherlands consists of two parts: northern and southern. Or according to the inhabitants of the country themselves, from a low and wooded land. The Dutch disease is called such a condition when the strengthening of the actual exchange rate of the national currency negatively affects the development of the economy due to growth in its single sector.
Reasons for the appearance
There are two reasons for the phenomenon. First of all, it is an increase in the extraction of natural raw materials and their export. The second reason follows from the first: a decrease in the volume of industrial production in the country. The increasing export of raw materials hinders the development of the national economy. Only the mining industry supplying the world market is developing. The influx of income leads to a rise in the cost of the national currency. This stimulates the cheapening of imports and an increase in its volume. Foreign goods are crowding out domestic producers. Dutch disease develops. Causes can develop rapidly or in slow motion. Approximately the same result can be observed with increasing prices for the export of natural resources.
History of occurrence
The Dutch disease appeared in the economy for the first time in the late fifties of the twentieth century. In 1959, the Groningen natural gas field was discovered in the north of Holland. Since 1960, fuel deposits are being developed, and exports are increasing. Rapid development of the mining industry is taking place, leading to an increase in inflation and unemployment. The decline in other areas of production is reducing the export of manufactured goods. The growth rate of income in the seventies is declining.
In 1977, the economic phenomenon was discussed in the press. The Dutch disease began in the Netherlands, and gradually spread throughout the world. The emphasis of the articles indicated the inability of the government to rationally distribute financial investments from the prosperity of the industry in the social sphere. The concept of Dutch disease was officially adopted in 2000.
The essence of economic disease
The characteristic features of Dutch disease are visible in a three-sector model of the economy. They stand out in production.
- Commodity sector. This includes mining and agricultural products.
- Commodity production sector. These are manufacturing and manufacturing industries: textile, engineering, metalworking, construction and others. They are united by the manufacture of finished goods with the addition of high value.
- Service sector. It includes: transport, healthcare, trade, housing and communal services, entertainment and so on.
The first two sectors manufacture products for domestic use and for export. In the economy, such goods are called “tradable”; their price is determined by the world market. Products of the third sector are supplied only to the domestic market, since it is not profitable to transport them. They do not compete with foreign goods, they are called "non-tradable". Their price is formed in the domestic market.
Increasing the profitability of the commodity sector allows for large investments in the modernization of mining technology.This leads to an increase in labor productivity. The possession of natural resources is regarded by the state as an incentive for the development of a specific factor of production. The predominant share of exports of raw materials allows using the increase in world prices as an impetus to the rapid growth of the mining industry. The demand for mobile resources is increasing (labor force, loans, and so on). Demand for production resources leads to an increase in their value.
The traded non-primary sector cannot respond to rising costs by increasing the price of the goods. From the rise in price of production resources, the cost of an item of a domestic manufacturer will change, but in the world market a completely similar product can be bought at a fixed world rate. A non-tradable sector can earn extra profit because rising consumer income offset the increase in costs.
Immediate effects of Dutch disease
Short-term and long-term consequences of the Dutch disease of the state economy are changes that negatively affect the commodity-production sector.
An increase in supply on the international market for mining products is changing the exchange rate of the national currency. Favorable economic conditions become a condition for a sharp jump in the export of raw materials and lead to an increase in foreign exchange earnings, which causes a rise in the exchange rate. In such conditions, the efficiency of the export of other goods from the country, especially the processing and knowledge-intensive industries, decreases. The manufacturing sector of the economy is losing consumers, as it becomes uncompetitive in the domestic market due to the influx of cheap imported products.
Long term effects
In the long run, commodity-production activity is losing ground in the competition with imported goods. Their labor costs exceed the permissible maximum, as there is not enough investment. Industries cannot afford to invest because of the high cost, and external revenues go to the extractive sector. Gradually, the price crisis worsens, a technological lag begins. The recycling sector is fading.
It is important to remember that price volatility is one of the main features of commodity markets. Macroeconomic instability arises. With high prices for resources and the strengthening of the national currency, the Dutch disease is exacerbating. Drop in commodity export prices worsens trade balance and there is a devaluation of the national currency. Indications for economic restructuring are being formed, and the development of the manufacturing sector is accelerating. Macroeconomic instability keeps the country of the exporter of raw materials in a constant state of structural and regional imbalance.
Spread around the world
The Dutch disease manifests itself in the economies of countries around the world. Oil exporters - Saudi Arabia, Mexico, Nigeria - encountered their symptoms in the mid-seventies - early eighties of the last century. The coffee supplier Colombia contracted in the seventies after an earthquake in Guatemala and a crop failure in Brazil. Prices for exported raw materials soared and countries curtailed exports of economically less profitable goods.
Each country was ill with a Dutch disease with its own specifics. Economically the developed countries and developing countries experience its symptoms in different ways. In the short term, commodity exports and imports of consumer goods become effective. Therefore, developing countries choose this specialization. But long-term development requires investment in high-tech industries.Most countries in the Middle East, Africa, Southeast and Central Asia, and Latin America follow the path of appropriating for their personal interests income from the raw materials industry. This does not facilitate investment in production and inhibits the development of states.
Symptom treatment
The more time the state spends on combating symptoms, the more destructive is the Dutch disease. Examples of protectionist measures show their effectiveness. Restraining the growth of the resource sector is carried out by the introduction of taxation. Collecting taxes is the beginning of treatment. A competent policy of their application is required. The passive method suggests creating an investment fund and replenishing foreign exchange reserves. The accumulated capital will become a fund for future generations, smooth out the influence of price fluctuations on the foreign market, attract foreign investment and reduce the exchange rate of the national currency.
Positive experiences from Norway
Two countries coped with the Dutch disease by restructuring the economy. Their experience deserves attention. These are Norway with state regulation and Great Britain with a liberal model.
The government has shown the effectiveness of its policies. The strategy of a small state took foreign economic changes as a constant value. All politics tried to minimize their negative consequences. As a result, the Norwegian government created a semblance of a stabilization fund. His funds were prohibited by law from being used domestically. They were aimed at mitigating inflation.
The result of strengthening the crown (national currency of Norway) began to decline in the competitiveness of industry and the collapse of the shipbuilding industry. The government has allocated funds for innovative modernization of oil production. The country emerged from an economic illness not only as an exporter of raw materials, but also equipment and technologies for its extraction.
UK Strategy
This is a big power policy. Britain decided to influence foreign economic changes. The government has opened new markets for products with low competitiveness domestically. They turned out to be Asian and Arab countries. The second step was the intervention of the Treasury in the foreign exchange market to stabilize the exchange rate of the national currency (pound sterling).
Russia and the Dutch disease
There is no consensus: the Dutch disease is developing in Russia or not. Each side gives its arguments.
Opponents of economic disease believe that there is no stagnation of the manufacturing sector in the country. Industry and services are developing at the same level. Oil prices contribute no more than forty percent to the country's economic growth, the remaining sixty are in the domestic market. The state lacks the main sign of the Dutch disease: an unexpected discovery of deposits, affecting the export of raw materials from the country and the exchange rate, which led to the lag of non-resource sectors of the economy.
Proponents of the diagnosis take an increase in export earnings as evidence, without going into the sources of their receipt.
Until 1998, the ruble exchange rate was controlled by the state, and there was no question of illness. Then, the national currency depreciated until 2003. One can observe signs of an economic disease from the moment the ruble strengthened (2003) until the crisis in August 2008. At this time, unemployment was falling, inflation was decreasing. But mechanical engineering developed, and other processing enterprises increased the export of their products. Therefore, academic signs of the disease were not observed in the country.
