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
  • Dutch disease

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