The Dutch Disease in Africa

By MICHELLE SIEFF | June 6, 2007

Book Review
Untapped: The Scramble for Africa's Oil
by John Ghazvinian

In "Untapped: The Scramble for Africa's Oil" (Harcourt, 336 pages, $25), John Ghazvinian visits a supermarket in the oil-producing West African country of Gabon. French cheeses and foie gras are for sale, but he can't find bananas. He asked a store clerk for bananas, "Pas des bananas," the clerk replied. No bananas. Not in the supermarket, nor in the local markets. In his week and a half in Gabon, the author feasted on beef bourguignonne and potato au gratin, but he never found a bunch of bananas. And yet, Gabon is largely virgin rainforest, filled with banana trees.

Economists have named this paradox the "Dutch disease," which refers to the impact on a country's exchange rate once it starts selling a valuable commodity, like oil, on the international market. As large amounts of foreign exchange flood in, the value of the country's own currency rises. Imported products become cheaper, and everyone rushes to buy foreign goods rather than local bananas and cassava. This isn't a problem until the oil runs out, and a developing country finds itself without a traditional agricultural or manufacturing sector to fall back on.



http://www.nysun.com/arts/dutch-disease-in-africa/55946/

The classic economic model describing Dutch Disease was developed by the economists W. Max Corden and J. Peter Neary in 1982. In the model, there is the non-traded good sector (this includes services) and two traded good sectors: the booming sector, and the lagging sector, also called the non-booming tradable sector. The booming sector is usually the extraction of oil or natural gas, but can also be the mining of gold, copper, diamonds or bauxite, or the production of crops, such as coffee or cocoa. The lagging sector generally refers to manufacturing, but can also refer to agriculture.

A resource boom will affect this economy in two ways. In the "resource movement effect", the resource boom will increase the demand for labor, which will cause production to shift toward the booming sector, away from the lagging sector.

This shift in labor from the lagging sector to the booming sector is called direct-deindustrialization. However, this effect can be negligible, since the hydrocarbon and mineral sectors generally employ few people. The "spending effect" occurs as a result of the extra revenue brought in by the resource boom. It increases the demand for labor in the non-tradable, shifting labor away from the lagging sector. This shift from the lagging sector to the non-tradable sector is called indirect-deindustrialization.

As a result of the increased demand for non-traded goods, the price of these goods will increase. However, prices in the traded good sector are set internationally, so they cannot change. This is an increase of the real exchange rate.

In simple trade models, a country ought to specialise in industries that it has a comparative advantage in, so theoretically a country rich in natural resources would be better off specialising in the extraction of natural resources. In reality, however, the shift away from manufacturing can be detrimental.

http://en.wikipedia.org/wiki/Dutch_disease

Minimization

There are two basic ways to reduce the threat of Dutch disease: by slowing the appreciation of the real exchange rate and by boosting the competitiveness of the manufacturing sector.

One approach is to sterilize the boom revenues, that is, not to bring all the revenues into the country all at once, and to save some of the revenues abroad in special funds and bring them in slowly. Sterilisation will reduce the spending effect. Another benefit of letting the revenues into the country slowly is that it can give a country a stable revenue stream, rather than not knowing how much revenue it will have from year to year.

Also, by saving the boom revenues, a country is saving some of the revenues for future generations. Especially in developing countries, this can be politically difficult as there is often pressure to spend the boom revenues immediately to alleviate poverty, but this ignores broader macroeconomic implications.

Examples of these sovereign wealth funds include the Government Pension Fund in Norway, the Stabilization Fund of the Russian Federation or the State Oil Fund of Azerbaijan or the Future Generations Fund of the State of Kuwait established in 1976.

Recent talks led by the United Nations Development Programme in Cambodia – International Oil and Gas Conference on fueling poverty reduction – point at the need for better education of state officials and energy cadres linked to a possible Sudden Wealth Fund to avoid the Resource curse/Paradox of plenty.[citation needed] Another strategy for avoiding real exchange rate appreciation is to increase saving in the economy in order to reduce large capital inflows which are able to cause an appreciation of the real exchange rate. This can be done if the country runs a budget surplus. A country can encourage individuals and firms to save more by reducing income and profit taxes. By increasing saving, a country can reduce the need for loans to finance government deficits and foreign direct investment.

Investing in education and infrastructure is able to increase the competitiveness of the manufacturing sector. An alternative is that a government can resort to protectionism, that is, increase subsidies or tariffs. However, this could be a dangerous strategy and could worsen the effects of Dutch Disease, as large inflows of foreign capital are usually provided by the export sector and bought up by the import sector. Imposing tariffs on imported goods will artificially reduce that sector’s demand for foreign currency, leading to further appreciation of the real exchange rate.



http://en.wikipedia.org/wiki/Dutch_disease

* Australian gold rush in the 19th century, first documented by Cairns in 1859
* Australian mineral commodities in the 2000s
* Signs of emerging Dutch disease in Chile in the late 2000's, due to the boom in mineral commodity prices
* Azerbaijanian oil in the 2000s
* Greatly increased export revenues for Indonesia after the oil booms in 1974 and 1979
* Irish Property Bubble in the 2000s
* New Zealand dairy industry boom in the 2000s
* Nigeria and other post-colonial African states in the 1990s
* The Philippines' strong foreign exchange market inflows in the 2000s leading to appreciation of currency and loss of competitiveness
* Russian oil and natural gas in the 2000s
* Gold and other wealth imported to Spain during the 16th century from the Americas

http://en.wikipedia.org/wiki/Dutch_disease

why is it dutch if I may ask?

The term “Dutch disease” was coined by The Economist magazine to describe a surge in income from new natural-gas fields in the Netherlands during the 1960s that triggered a currency gain and eroded other exporters’ earnings. The term has since been applied to similar situations from Venezuela to Russia to describe how natural resource finds can hurt industry.

http://www.bloomberg.com/news/2010-11-01/israeli-economy-risks-dutch-disease-as-gas-finds-help-strengthen-shekel.html

^^Interesting topic, IMO Dutch disease is a more a symptom of policy failure rather than an economic phenomenon. I belive a strong currency is an important pillar of industrialisation as it allows you the following:


Ability to import inputs cheaper
Ability to import skills and foreign tech cheaper
Ability to keep domestic prices low
It encourages biz managers to focus on productivity rather than price as a driver of profitability, etc
It enables a country's citizens to travel more extensively, this is key for trade

^^Interesting topic, IMO Dutch disease is a more a symptom of policy failure rather than an economic phenomenon. I belive a strong currency is an important pillar of industrialisation as it allows you the following:


Ability to import inputs cheaper
Ability to import skills and foreign tech cheaper
Ability to keep domestic prices low
It encourages biz managers to focus on productivity rather than price as a driver of profitability, etc
It enables a country's citizens to travel more extensively, this is key for trade


+1. It encourages first quality above second quality.

^^In SA, our currency has strengthened more than 30% against the dollar since the crash of 2008 and all our economic indicators are showing a robust recovery.

Inflation is at record lows as a result of strong rand,
Motor companies are investing record amounts of dollar into manufacturing
Food price inflation is at 1% as a result of low fertilizer and diesel prices
Tourism (both inward and outward) is growing at a rapid rate
Govt is investing a massive amount in all manner of infrastructure: power plants (medupi, kusile and Inga), biggerst fuel pipeline u/c globally, deep-water ports u/c
PVT sector investment is slowly waking from a deep slumber after the 'Great Recession'
University places have been doubled recently
Govt is progressively introducing free education until undergrad level
consumer spending is recovering robustly, malls were packed to capacity during the December period, smartphones, IPADS and flat-screen TV's are being bought at a rapid rate in SA

All these cannot be funded with a constantly weakening currency. A strong currency is vital for industrialising countries IMO...

SA Agriculture News

Projected maize surplus reaches 6 million tonsJanuary 12 2011 at 09:48am


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Independent Newspapers

Sufficient summer rain has boosted South Africas maize crop, leading to a 6 million ton surplus that has kept prices down. Farmers may benefit from higher global food prices after droughts and floods.
Plentiful summer rain in the maize triangle has enabled farmers to harvest bumper crops, boosting the surplus of maize stocks, according to Ernst Janovsky, the head of agribusiness at Absa.

As a result, the estimate of this season’s maize surplus has been revised to 6 million tons from a projection of 4 million tons in November last year.
At a recent presentation on the agricultural outlook, Janovsky said 70 percent of local agricultural prices were influenced by world prices.
Andre Jooste, a senior manager for marketing and economic research at the National Agricultural Marketing Council, explained that South Africa was a relatively open market, which meant the current concern over food prices globally would inevitably spill over into the South African market.
He said South Africa was currently a net importer of processed foods, rice and wheat, and an exporter of commodities such as maize and soya beans.
A report from Econometrix said indices of international food prices had risen by an average of 30 percent a year in dollar terms in the recent past.
The head of commodities at PSG Prime, Pieter van Wyk, said US maize prices had risen by 85 percent since July last year and the trend reflected a shortage of grain stocks.
His analysis of the prices was based on Chicago Board of Trade figures, which showed a sharp increase in maize futures from $130 (R886) a ton in July 2010 to $240 a ton this month

“International prices have been rising and maize earning stocks are the tightest in 15 years. In contrast our stocks are fairly loose, which will result in a 3 million earning stock, so it looks like its going to be a good season,” he said.
With higher revenues and relatively low input inflation, profits are likely to improve in the long run.
Nico Hawkins, an economist from Grain SA, said farmers stood to benefit from better prices internationally, although prices would stay low on the domestic front.
Hawkins said farmers could not currently make a profit because the costs to cultivate a hectare of maize were higher than the income per hectare. He said farmers could benefit from price increases if the exchange rate weakened.
Hawkins said if current prices increased, traders stood to make a profit in the local market. He noted that if there was going to be a reduced global supply of maize, it would put South African farmers in a better position.
He also maintained that domestic maize prices were currently at their lowest in years because of the surplus and the strength of the rand.
Elizabeth Trudeau, a spokeswoman for the US diplomatic mission to South Africa, said the exporting of South African maize had helped to meet the demand for food in other parts of Africa and across the world.
A report from Econometrix said the rise in international food prices could be attributed to crude oil gains and economic growth on the back of massive global stimulus packages.
Food prices had also surged because floods and droughts had hit crops around the world.

Janovsky explained that although the stronger rand reduced the value of exports, it presented good investment opportunities, especially for imported machinery.
Low interest rates were also helping, he said.. - Ayanda Mdluli

Because of lack of control and the ability to harness those resources for the benefit of its economy and citizens due to internal/external influence.