Dutch disease and the resource curse

"Dutch disease" is the mechanism by which an export windfall lifts the national currency and renders the other exporting sectors — industry, agriculture — uncompetitive. The term was coined by The Economist in 1977, to describe the decline of Dutch manufacturing after the exploitation of the Groningen gas field. It works through two effects, formalised by Corden and Neary in 1982: the "spending effect" (the windfall income swells demand and the real exchange rate appreciates) and the "resource-movement effect" (labour and capital migrate towards the booming sector). The result is a lopsided economy: a thriving resource sector, ringed by an industry and an agriculture that wither.

The "resource curse" (an expression popularised by Richard Auty in 1993 and backed by the study of Sachs and Warner in 1995) encompasses Dutch disease but reaches further: resource-rich countries often grow more slowly, the "paradox of plenty". The channels: the volatility of commodity prices, which makes budgets erratic; rent-seeking and corruption; underinvestment in education; and, above all, a political effect. A state financed by the rent of a resource, rather than by the taxes of its citizens, stops depending on them: it owes them less of an account, and its institutions weaken. The windfall can thus buy the unaccountability of those who manage it.

The remedies are known. The first is the sovereign wealth fund: the windfall is invested, and each year only the fund's expected return is spent, never the raw and volatile receipts (the Norwegian "rule"). Next come the fiscal rules that disconnect public spending from the price of the commodity (Chile's structural balance rule), the diversification of the economy beyond the extractive sector, the transparency of revenues (the Extractive Industries Transparency Initiative, EITI), the management of the exchange rate (saving abroad to slow the appreciation), and investment in human capital. None is magic; together, they make the difference between Norway and Venezuela.

The curse is not deterministic. Recent research has shifted the debate from a fatalistic frame to a conditional one: everything depends on the quality of institutions. Mehlum, Moene and Torvik (2006) summed it up — "institutions rule": where they are "producer-friendly", the resource enriches; where they are "grabber-friendly", it impoverishes. Others (Brunnschweiler and Bulte, 2008) even contest the founding statistical result: the usual measure would capture dependence on resources, not abundance, and would confuse cause with consequence. A resource is thus less a poison than a magnifying mirror: it amplifies what a country already is.