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Russian Oil Sector & "Dutch Disease"

I. Introduction: Natural Wealth and "Dutch Disease"

Abundance of natural resources might appear to be inherently beneficial to an economy that has access to them. Primary resources are one of the basic forms of capital (Gylfason, 2001), so low-cost access to them would seem to give an economy not only lower internal costs, but an inherent competitive advantage over other economies. Experience, however, shows that the opposite is often the case. Spain in the 16th century had access to vast quantities of gold and silver from the Americas, but far from booming the Spanish economy went into long-term decline (Benjamin, Devarajan, and Weiner, 1989).

Modern experience has reinforced this old lesson. Resource-poor economies such as Japan are often much more successful than those of more richly-endowed countries such as Brazil. This is so much the case that economists have even spoken of a "resource curse" (Usui, 1997, pp. 151-52):

The richer the natural resource endowment, then, first, the longer lax macro economic policies are tolerated; second, the less pressure to achieve rapid industrial maturation; third, the longer rent-seeking groups are tolerated (and the more entrenched they become); and fourth, the greater the likelihood of decelerating and more erratic economic growth (Usui, 1997, p. 152).

The negative effects of natural bounty have been felt in developed economies as well as Third World economies. In the early 1970s, the Netherlands -- a highly industrialized, developed economy -- opened substantial natural gas production and exports. The paradoxical consequence was other Dutch exports fell behind. The effect was so marked as to be given the name "Dutch disease."

Dutch disease is essentially a condition of imbalance. Easy income from oil exports tends to draw investment capital away from the rest of the tradable-good sector. At the same time, the income has an inflationary effect, driving up real ex...

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Russian Oil Sector & "Dutch Disease". (1969, December 31). In LotsofEssays.com. Retrieved 12:34, March 28, 2024, from https://www.lotsofessays.com/viewpaper/1694593.html