The Dutch Disease, according to the International Monetary Fund (IMF), refers to the harmful consequences emanating from the sudden increase of a nation’s income, more so its currency.
It was coined by The Economist magazine following their analysis of the effects that the natural gas discoveries had on the Netherlands.
The Dutch Disease can be occasioned by an increase in a tradable natural resource, eg oil, which can lead to the appreciation of a country’s real exchange rate. This would lead to an increase in the local currency, consequently making the country’s exports in other industries more expensive, while imports become cheaper.
If not catered for, this can lead to performance in those non-booming sectors diminishing.
According to the IMF, in its article “Dutch Disease: Wealth Managed Unwisely”, during the 1960s, the Netherlands experienced a vast increase in its wealth after discovering large natural gas deposits in the North Sea. “Unexpectedly, this ostensibly positive development had serious repercussions on important segments of the country’s economy, as the Dutch guilder became stronger, making Dutch non-oil exports more expensive and, therefore, less competitive. This syndrome has been witnessed in many countries across the world, including but not limited to resource-rich commodity exporters. Although Dutch Disease is generally associated with a natural resource discovery, it can occur from any development that results in a large inflow of foreign currency, including a sharp surge in natural resource prices, foreign assistance, and foreign direct investment.”
Globalisation in the 21st century has taken on a more dynamic effect with the onset of the COVID-19 pandemic in April of 2020, resulting in countries that were hard hit by the coronavirus relying heavier on the importation of goods, remittances, and Foreign Direct Investment benevolence. This state of affairs will invariably affect how countries give priority to their productive sectors, and how they can cushion the shocks of their under-performing sectors against the volatility of the exchange rate.
In this pandemic, few countries can lay claim to positive growth to such an extent where the Dutch Disease would become a factor worth considering.
Fortunately, Guyana ranks among the few with a growth rate of 26 per cent in 2020 – significant by normal standards, and incredible during a pandemic.
With the discovery of tangible oil deposits in 2015 by ExxonMobil, Guyana has been placed on the radar as one of the countries expected to significantly increase its income-earning capacity.
Prudent management of Guyana’s economy, therefore, is integral in ensuring that it averts the Dutch Disease phenomenon.
Stabilisation of the currency appreciation has been posited as one of the best ways to circumvent the effects of the Dutch Disease.
According to the Inter-American Development Bank (IDB), one of the best ways to ensure stability is by setting up a Sovereign Wealth Fund (SWF) that caters for the inflows of capital into the economy, to prevent it from overheating and causing significant currency appreciation.
Excess revenues can then be spent on education or infrastructure that would help to diversify the economy.
Research suggests that of significant importance is a nation’s management of its human resources. Providing the requisite opportunities for training in the oil and gas sector for the population would aid significantly in providing resilience.
Diversification is also the mantra used to ensure that the Dutch Disease does not take hold. Prior to the introduction of oil, Guyana had traditionally been reliant on its agricultural and natural resources sectors, such as rice, gold, bauxite, etc, to earn.
Economic experts opine that policymakers must not allow the economy’s external competitiveness to decline. Meaning, reliance has to be placed on enhancing agricultural productivity, so that Guyana’s dependence on imported processed food items can be decreased. This would counteract the inflationary growth that can be precipitated when the exchange rate fluctuates and affects the purchasing power of the domestic currency.
Neighbouring Venezuela is a classic example of why diversification is important. Currently in the midst of a crisis, Venezuela was a leading exporter of oil, which became its most significant earner. When the world demand for same reduced, Venezuela was not able to translate the economy’s wealth generated from its windfalls into sustainable economic growth and prosperity for its citizens. The country’s political ideology has also left it socially and economically cut off from the liberal First World countries, who tend to offer assistance and aid in times of a crisis.
To avoid the Dutch Disease, the Government needs to manage the structural changes that will flow from swift growth, to ensure economic stability. Diversifying exports to reduce dependence on the booming oil sector would increase Guyana’s resilience to external shocks. Moreover, the policymakers must create an enabling environment for growth by partnering with the Private Sector and other stakeholders to ensure the provision of adequate education and training to equip and expand our human resource component.
Thankfully, the governing administration has started the process, and has mechanisms in place to avoid the Disease.
