Dutch Disease Effects in Zimbabwe
Dutch disease is an economic term for the negative consequences that can arise from a spike in the value of a nation’s currency. It is primarily associated with the new discovery or exploitation of a valuable natural resource and the unexpected repercussions that such a discovery can have on the overall economy of a nation.[1]
Background
The term Dutch disease was coined by The Economist magazine in 1977 when the publication analyzed a crisis that occurred in The Netherlands after the discovery of vast natural gas deposits in the North Sea in 1959. The newfound wealth and massive exports of oil caused the value of the Dutch guilder to rise sharply, making Dutch exports of all non-oil products less competitive on the world market. Unemployment rose from 1.1% to 5.1%, and capital investment in the country dropped.
Dutch disease became widely used in economic circles as a shorthand way of describing the paradoxical situation in which seemingly good news, such as the discovery of large oil reserves, negatively impacts a country's broader economy.
Understanding Dutch Disease
Dutch disease exhibits the following two chief economic effects:
- It decreases the price competitiveness of exports of the affected country's manufactured goods.
- It increases imports.
Both phenomena result from a higher local currency. In the long run, these factors can contribute to unemployment, as manufacturing jobs move to lower-cost countries. Meanwhile, non-resource-based industries suffer due to the increased wealth generated by resource-based industries.
Effects of Dutch disease in Zimbabwe
Zimbabwe must carefully craft policies and strategies to avoid the twin evils of a natural resource curse and the Dutch disease if the country is to benefit from its vast mineral deposits, economic development experts said.
Leading a natural resources discussion forum arranged by Southern African economic think-tank, Macro economic and financial management Institute of Eastern and Southern Africa (Mefmi) in Harare in 2013, Jan Isaksen, an economist and counsellor of the Norwegian Embassy in Zambia, said there was a tendency for resource rich countries to grow slower than their counterparts due to high levels of graft and corruption that can become pervasive in resource-rich economies, particularly in the early years after the discovery of the resources. “In addition, there is sometimes a rapid movement of capital and labour from other traded sectors to the resource sector, a phenomenon known as the Dutch Disease,” he said.
The natural resource curse is a phenomenon where a resource rich country or region fails to develop economically despite its resource base due to poor governance, rampant corruption or civil wars or other conflicts that arise due to the resource endowment.
The “Dutch Disease” on the other hand describes an economic process where the resource sector drains productive resources from other sectors of the economy leading to stunted growth in these sectors or a skewed economy. According to Isaksen, the Norwegian parliament in 1971 adopted what they called the “ten oil commandments” that underpinned the country’s oil policy based on the principle that the natural resource was owned by all Norwegians and should fall under national supervision and control.
The policy was hinged on the establishment of a state oil company, Statoil, through which all licences would be issued to foreign partners on a 50% equal partnership with the government oil company. The second most important thing the Norwegian did was to set up a sovereign wealth fund into which all oil revenues would flow. The parliament then set up a fiscal rule that the government budget deficit in any one year would not exceed the expected real return on the fund which was estimated at 4% per annum.
Despite being well endowed with natural resources Zimbabwe has struggled to create an environment in which the resource base can be leveraged to spur economic growth. A toxic political environment that is viewed as hostile to foreign investment has been cited as a challenge. Discussants also blamed the large multinational corporations for fueling corruption as a deliberate policy saying this undermined the potential for poor countries.[2]
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