Democracy and the Dutch Disease
Addressing state actors’ tendency to splurge new found wealth unproductively, Yash Agarwal writes of the problems plaguing Venezuelan oil reserves. He further outlines the institutional reforms that can be undertaken in order to prevent such wide- scale failures.
Venezuela in South America has world’s largest proven reserves of oil, at 297 billion barrels (in comparison Saudi Arabia has around 265 billion barrels of reserves) and it is enough for it to keep producing for the next 234 years at the current consumption rate. Given its small population and massive natural wealth and resources, it’d be a wealthy, prosperous nation with stable socio-economic conditions. Right? Well, the country’s economy is predicted to shrink by 8% this quarter, it’s currency has lost almost all of it’s value, inflation is in triple digits, it’s people are dying of hunger and it’s Supreme court was recently bombed using a helicopter last week by an estranged member of it’s own armed forces. Oh, and Oil alone provides more than 95% of the country’s export revenues.
The term “Dutch Disease” was coined by The Economist magazine in the year 1977 while analyzing the economic debacle unfolding in Netherlands, post the discovery of vast hydrocarbon resources in the North Sea which led to a massive spurt in oil products, further fueling a sharp, sudden and sustained rally of the Dutch Guilder as well as imbalances in its socio-economic setup. Cascading, non-oil exports became non-competitive, unemployment more than quadrupled to 5.1% and capital investment in the country dropped, among other repercussions. In contemporary economic parlance, it commonly denotes the shift of labor and growth from a ‘lagging’ sector of the economy to one, which is booming due to discoveries or appreciation of newfound natural wealth (which comes with its own share of imbalances and consequences).
Venezuela is just one example of this phenomenon. From the Australian Gold Rush in the 19th century, to almost all post-colonial African economies in the 1990s, to Netherlands post the discovery of natural gas in the North Sea to even Russia today, history is replete with instances of nations splurging their newfound wealth unproductively so as to structure imbalances and precipitate economic crises for themselves later on. Importantly, any such development invariably has substantial bearing on, inter alia, the political setup of the state as well.
Governments over the ages and across the world have been known to go to any extent to avoid cutting back on budgetary spending and this is especially true for economies under such a condition, given that sudden discovery of wealth is almost compulsorily accompanied by much higher social and welfare spending, a setup the populace very easily comes to adore and gets used to, hence any reversal of the same invites social and political upheaval and upending. With no socio-political capital for initiating much needed change and disrupting the utterly unsustainable status quo, any ‘reform’ especially those involving cutting back on social spending comes across almost as a cussword. Incredible but true, most such states and their political actors wait in almost anticipation of a greater crisis to precipitate so uncomfortable reforms can be justified to their electorate at large. It’s almost as if a cycle of despair and haplessness sets in.
There are a few other aspects to the Dutch Disease’s varied implications at large which merit attention. Among the many that exist, three among them standout.
Firstly, a spurt in a country’s resources and accompanying spike in social and welfare spending helps those in charge of the current government craft almost a cult-like figure for themselves. The socialist governmental setup in Venezuela being a contemporary example of the same. It’s almost as if the government of the day buys social stability and political backing, in exchange for sops like cuts in taxes, numerous subsidies, free services like healthcare and other means of splurging the nation’s wealth almost always unproductively.
Secondly, what such a phenomenon leads to, is a festering of undemocratic, dictatorial governmental setups in the states given consolidation by the ruling heads of the cult like status and political capital they acquire by virtue of discretionary spending of their nation’s wealth. Often in such setups, the masses have little or no say in how the country is run and it’s resources leveraged, unlike a democracy. The Venezuelan President now plans on rewriting the constitution after having suspended civil liberties in midst of his state’s economic collapse and socio-political decay.
Thirdly, what such a situation also leads to is the decay and subsuming of existing institutions and ad-hoc institutions that are setup in their place, leading to something called as the “resource curse”. Institutions, both governmental and otherwise, as we know it, inextricably shape a nation’s socio-economic outlook at large. Subsuming of resilient, historical and inclusive institutions only to replace them with ad hoc ones with myopic vision is a grave error, one that has a huge part to play in exacerbating the ensuing crises.
Sane, sustainable public policy making is also often a casualty of such a development. Sensible discussions on the implications of socio-economic-political decisions made are rendered effete, no inputs are considered, decisions get more and more ad hoc, immediate and exclusionary and those in power almost always stop considering the public and it’s effects on them when framing public policy at large. Collective wisdom is abhorred, seems as an impediment in fact by the ruling elite(s) and whimsical decision-making ensues. Planned, thought out saving or investment instead of floundering newly discovered revenue is on almost nobody’s checklist. For the approximately 100 developing countries having a high ratio of natural-resource exports to GDP, when the commodities as a resource run out, there will be little left to sustain many of these economies.
Dutch disease, as an economic phenomenon is in my opinion best tackled by institutional reforms. Profligate and wasteful spending of what is a nation’s wealth resource is almost always kept in check under a variety of conditions and given a range of reasons. Firstly, a democratic setup of governance is like the sine qua non for such a check to be in place. When the representatives are elected by the masses and not an insular elite, it enforces a degree of accountability and increased awareness per se in the minds of those in power. We’ve precedents in the fact that a majority of the countries facing an economic crisis of this nature aren’t democracies or are one for namesake. Secondly, there must be reforms done which ensure that there’s a panel of individuals with control over government spending and budgetary decision-making so as to ensure a larger consensus and prevent whimsical allocation of resources with balances in place. The obvious, diversification of a country’s revenue streams should be prioritized and structural well-being ensured. Oversight institutions with a long-term vision might be established and equipped with technocrats having domain knowledge and power to make decisions. Instruments of direct democracy can also be occasionally deployed to evolve a consensus at large and get a feel of what the collective wisdom is for a given subject.
Speaking of solutions, fortunately, we have a model of administration which has a resolve for almost all the highlighted issues precipitated by sudden discovery of natural resources and the wealth these generate. Norway, is the country being referred to. It’s Government Pension Fund Global (it’s not a pension but an oil wealth fund) is a fund into which the surplus wealth produced by Norwegian petroleum income is deposited. In their own words, “The Government Pension Fund Global was set up in 1990 to underpin long-term considerations when phasing petroleum revenues into the Norwegian economy.” With an asset base of 958 Billion USD, the fund today is the largest of its kind and it’s incredibly well planned to benefit most sections of the Norwegian society. It’s utterly sustainable and accounts for the fact that oil would someday run out and hence how the fund can continue to benefit the Norwegian people and it’s economy even after the resource is extinguished, all a hallmark of sound, inclusive and futuristic policy planning. A lot to learn from and emulate.
