Dutch disease
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  • Decreased global competitiveness of manufacturing sector due to high domestic input pricesIn some cases, foreign producers may enter the market and drive down prices to level where domestic producers cannot compete

Transcript

  • 1. Team:
    ArtemChepurnoy
    Vera Lazarenko
    DmitriyKovalenko
    DmitriyAsinovskiy
    EvgeniaBelova
    Dutch disease (resource curse)
    Impact on international competitiveness
  • 2. What is the Natural Resource Curse?
    Many developing countries with abundant natural resources experience lower rates of economic growth and development than countries with few natural resources
  • 3. “Dutch Disease”
    The Economist (1977)
    1960s – Discovery of large
    natural gas deposits
    in the North Sea
    Subsequent shift in resources and decline in the manufacturing sector
  • 4. Dutch Disease1970s: Netherlands
    Influx of revenue from natural gas led to increasedspending on social programs
  • 5. Dutch Disease1970s: Netherlands
    “Crowding out” of manufacturing led to lost jobs
    Creation of “safety net” social programs resulted in high levels of unemployment and disabilities
  • 6. Netherlands: Export Performance
    Researches concerned about the reasons of worsened export performance
  • 7. How does it work?
    Cordon and Neary model, 1982
  • 8. The Specific Factor Model
    TRADABLE
    Manufacturing
    Energy/Mineral
    WORLD ECONOMY
    COUNTRY ECONOMY
    NON-TRADABLE
  • 9. The Specific Factor Model
    𝑝(𝑡) = 𝑐𝑜𝑛𝑠𝑡 – relative international prices for tradable goods are fixed
    𝑝(𝑛) – price for non-tradable goods is determined by demand and supply
     
  • 10. The Specific Factor Model
    TRADABLE
    Manufacturing
    Manufacturing-type capital
    Energy/Mineral
    Labor
    Natural resources
    NON-TRADABLE
    Non-tradable-type capital
  • 11. The Specific Factor Model
    Each sector uses two factors of production:
    𝑌𝑖=𝑌𝑆𝐹𝑖,𝐿 
    𝑆𝐹𝑖 - specific factor of production for sector 𝑖
    𝐿 - labor, which is perfectly mobile among sectors
    The real wage is perfectly flexible
     
  • 12. Spending effect
    There is a boom in mineral sector, which increases country GDP and thus demand in the country 𝑌𝐷.
    Let’s suppose, the demand increases equally on manufacturing and on non-tradable products.
     
  • 13. Manufacturing goods market
    𝑃
     
    𝑃
     
    𝑄
     
    𝑄1
     
    𝑄2
     
  • 14. Non-tradable goods market
    𝑃
     
    𝑃2
     
    𝑃1
     
    𝑄
     
    𝑄1
     
    𝑄2
     
  • 15. Spending effect
    So, the price for non-tradable goods rises in terms of tradable goods
    This makes production of non-booming tradable goods less attractive for domestic producers
    Finally, tradable goods (manufacturing) sector narrows
  • 16. Factor reallocation effect
    𝑤
     
    𝑤
     
    𝑉𝑀𝑃𝐿𝑌
     
    𝑉𝑀𝑃𝐿𝑋
     
    Manufacturing industry (Y)
    Mineral industry (X)
    𝑤2
     
    𝑤2
     
    𝑤1
     
    𝑤1
     
    𝑂𝑥
     
    𝑂𝑦
     
    𝐿1
     
    𝐿2
     
    Labor distribution
  • 17. Factor reallocation effect
    Labor force moves from the manufacturing industry, so the industry lacks for labor
    Cost of labor increases for manufacturing industry
    So, this effect squeezes profitability and output of the manufacturing industry
    Decreased global competitiveness of manufacturing sector due to high domestic input prices
    In some cases, foreign producers may enter the market and drive down prices to level where domestic producers cannot compete
  • 18. Effects of resource curse: practical implications
    Market effect
    Exchange rate appreciation
    Price volatility, discouraged FDI
    Demand for labor, capital, goods
    Deflected entrepreneurial activity
    Government spending
    Social programs
    Political
    Rent-seeking and corruption
    Social
    Capital Formation
    Savings
    False sense of security
    High inequality
    Change in economic incentives of individuals
  • 19. Effect on wealth creation: Change in economic incentives of individuals
    Engage in entrepreneurial activity in other sectors
    Gain a share of the wealth of booming sector:
    industry's growth is usually limited by the availability of the resource
    (size, rate of usage)
    cannot be expanded by having resources being put into it
    Competing for a larger share of a pie of fixed size
  • 20. Symptoms and diagnosis
    Mineral wealth’s correlation with:
    Appreciation of the real exchange rate
    Civil wars
    Low economic diversification/growth
    Authoritarianism/poor governance & weak institutions
    High inequality
  • 21. Dutch Disease: Impact on International trade and competitiveness
  • 22. International Competitiveness
    Analyzing of macroeconomic performance
    Explaining of international trade trends
    Main factors:
    technologicalinnovation
    degree of product specialization
    the quality of the products
    involved, or the value of after-sales service
    high rates of productivity growth
  • 23. Measures of international competitiveness
    Difficult to measure
    No unique approach
    Criteria:
    Cover all sectors
    Encompass all the markets
    Fully comparable internationally data
  • 24. Measures of international competitiveness
    Import Competitiveness (IC)
    Export Competitiveness (EC)
    Overall Competitiveness
    EC* + IC*
    INTERLINK Model explains changes in countries’ changing in exports
  • 25. Diseased countries
    Nigeria
    Azerbaijan
    Russia
    Norway
    Botswana
    VS
  • 26. Nigeria
    First oil found in 1956 by The Shell D’Arcy
  • 27. Nigeria: 1960-1970
    GDP
    54%
    Total Export Earnings
    Agriculture
    51%
    Employment
    72%
  • 28. Nigeria: since 1970
    GDP
    54%
    Total Export Earnings
    Oil
    91%
    10%
    Employment
    70%
    Agriculture
  • 29. Nigeria: problems
    Huge external debt
    High unemployment
    Overdependence on oil
    Huge public expenditures
    Corruption
    Money wasted
  • 30. Russia
    Ratio of Hydrocarbon Exports to Gross Domestic Product, 1992–2005
  • 31. Russia
    1991-1998
    Russian manufacturing industry: -56%
    Machine building and metalworking: -64%
    Timber, woodworking, paper industry: -66%
    Building materials: -70%
    Light industry: -89%
    Food processing: -47%
    Crude oil output: -32%
    Gas output: -15%
    As a result, additional hydrocarbon resources were freed up for export.
    Thus, Russia experienced the onset of the “Dutch disease” in 1992–1998.
  • 32. Russia
  • 33. Azerbaijan
    Symptoms of Dutch Disease since 2005
    • Growth of oil sector GDP with declining growth of non-oil tradable sector
    • 34. Growth of oil sector share in economy
    • 35. Sharp government expenditure growth and especially growth of investments in non-tradable sector
    oil
    time
  • 36. Azerbaijan
    GDP dynamics and structure
  • 37. Azerbaijan
    Labor force
    • No significant movement of labour force to the oil sector
    • 38. As a result no “resource movement effect” – characterized as a symptom of Dutch Disease
  • Azerbaijan
    Government investments
    • Dramatic investments in non-tradable sector since 2005
    • 39. Money come from the oil sector
    • 40. “Spending effect” – symptom of the Dutch Disease
  • Norway
    First oil found in 1969
    Before oil:
    The poorest Scandinavian country
    Slow growth
  • 41. Norway
  • 42. Norway and oil discovery
    No harm to non-oil sectors
    Economical development
    Used government policies to avoid DD
  • 43. Norway’s policies to avoid DD
    Pay back foreign debts when possible
    Invest abroad
    Encourage domestic accumulation of instead of using foreign specialists
    Channel resources into education, research and development
    Putemphasisonknowledge, technological progress, and human capital
    Stimulate female participation in the labor market
  • 44. BOTSWANAEVIDENCE & EXPLANATION OF EXCEPTIONALISM
    Sustained economic growth and socio-economic development since 1966
    Mineral wealth
    Good macro-economic management
    Good governance and institutions
  • 45. Evidence 1: Sustained economic growth since 1967
  • 46. Evidence 2: Sustained socio-economic development
  • 47. Explanation 1: Mineral wealth - diamonds
  • 48. Explanation 2: Good macro-economic management
    Successful in utilizing the financial capital from mining to drive and sustain economic growth and development.
    Popular explanation:
    country’s sound macro-economic
    objectives and policies
  • 49. Explanation 2
    Two objectives adopted very early:
    Avoidance of external debt and stabilization of government expenditure
    Management of the exchange rate in order to promote economic diversification
  • 50. Explanation 3: Good governance and institutions
    A functioning constitutional multi-party democracy since 1966.
    Enduring social and political stability
    Free media
    Quality and respected governance and watchdog institutions
  • 51. ARE THERE STILL ANY RESOURCE CURSE SYMPTOMS?
    Weak diversification despite efforts
    High unemployment (16-40%):
    • low job creation capacity of diamond mining
    • 52. weak development of the non-mining private sector
    High inequality(Ginicoefficient - 0.56, 1980-1998)
    Increasing expenditure on public consumption (from 0.84 in 1995 to 1.08 in 2007).
  • 53. Trends in economic sector shares, 1966-2005 (Based stats from Siphambe, 2007, p.3)
  • 54. COMPOUNDING FACTORS
    Geographic isolation – landlocked deep into the interior of Southern Africa
    Drought proneness, soil infertility agricultural development challenging
    Small domestic market
    SACU free trade area membership
    HIV/AIDS
    Anyway, Botswana has so far largely succeededin fighting resource curse
  • 55. Any treatments for “Dutch Disease”?
    Primary concern of financial institutions
    (World Bank/IMF):
    “Democratic, consensual and transparent processes” (Stiglitz)
    Anti-corruption programs
    Assistance of Western governments
    Stabilization funds
  • 56. Any treatments for “Dutch Disease”?
    I. Slowing the appreciation of the real exchange rate
    1. Sterilize the boom revenues:
    • save some of the revenues abroad in special funds
    • 57. create a stable revenue stream
    • 58. save some of the revenues for future generations (hard in developing countries)
    2. Increase saving in the economy in order to reduce large capital inflows
    • Encourage individuals and firms to save more (reducing income and profit taxes)
    • 59. Increase Saving - reduce need for loans to finance government deficits and FDI
  • Sovereign wealth funds
    The Government Pension Fund in Norway
    The Stabilization Fund of the Russian Federation
    State Oil Fund of Azerbaijan
    Future Generations Fund of the State of Kuwait
  • 60. Any treatments for “Dutch Disease”?
    II. Boosting the competitiveness of the manufacturing sector
    Investing in education and infrastructure
    BUT NOT PROTECTIONISM!
    selling rights to natural resources,
    subsidizing other industries
    imposing tariffs on imported goods
  • 61. Conclusion
    Natural resources: curse or blessing?
  • 62.
  • 63. References
    Booming sector and Dutch Disease Economics: Survey and Consolidation, W.M. Cordon, Oxford Economic Papers, 1984
    Boom and gloom. Azerbaijan's economy, drunk on oil, is suffering rapid - inflation, The Economist, 2007
    “Diagnosing Dutch disease: Does Russia have the symptoms?”, Oomes N., Kalcheva K. (2007) International Monetary Fund
    “Dutch disease and Azerbaijan economy”, Hasanov F., Econimics Education and Resource Consortium , Baku, 2010
    DOUBLE DIAMONDS, REAL DIAMONDS: BOTSWANA’S NATIONAL COMPETITIVENESS
    Jay van Wyk, Pittsburg State University, Academy of Marketing Studies Journal, Volume 14, Number 2, 2010
    Escaping the Natural Resource Curse and the Dutch Disease’, Larsen, E., 200, Statistics Norway, Research Department, Discussion Papers No. 377
    Impact of Government Expenditure on Growth: The Case of Azerbaijan,  Koeda J., Kramarenko V. , IMF Middle East and Central Asia Department, 2008
    Indicators of international competitiveness: conceptual aspects and evaluation,” Durand M., Giorno C. (2008) , Organisation for Economic Co-operation and Development (OECD)
    Lessons from the Dutch Disease: Causes, Treatment, and Cures’, Gylfason, T., 2001, Institute of Economic Studies
    Nigeria: Petroleum Revenue Management, PREM Sector Unit, Sub-Saharan Africa region’, Washington DC, World Bank, 2004,
    The Primary Sectors of the Economy and the Dutch Disease in Nigeria’, Olusi, J., Olagunju, M., 2005, The Pakistan Development Review, Vol. 44 : 2,pp. 159–175
    The Dutch disease in Russia: Macroeconomic and structural aspects,Problems of Economic Transition, Fetisov G. (2007) Vol. 50, Iss. 1, 2007, 53–73.
    THE DETERIORATION OF THE NETHERLANDS' EXPORT. PERFORMANCE DURING THE LATE 1970's: A MATTER. OF COMPETITIVENESS OR EXPORT STRUCTURE?, S. Brakman, C. J. Jepma and S. K. Kuipers, DE ECONOMIST, Volume 130, Number 3, 360-380
    Trade in Minerals, Graham A. Davis, Division of Economics and Business,Colorado School of Mines, December 15, 2009