“Those who deny freedom to others, deserve it not for themselves”
― Complete Works – Volume XII
In economics, the term Dutch Disease occurs when a country becomes too reliant on a resource. What occurs is a resource or commodity in the country is profitable and as a result, more resources and a greater portion of the workforce go into that industry allowing other industries to decline. This is seen in a number of OPEC countries in the Middle East that are extremely reliant on oil. Oil and the resulting petroleum products are a commodity if oil prices fall, the economy in these countries do poorly, and furthermore, the government has less money for civilian provisions. This tends to happen with natural resources, but can also occur with other commodities manufactured goods, agricultural exports, etc… Many of these countries become net importers of agricultural products, services, and manufactured products. This presents more of a problem in democratic countries as opposed to authoritarian countries, in Saudi Arabia when oil prices fall, the Saud family and other prominent families such as the Bin Ladens suffer as much of the individuals in the common population do not many benefits from oil royalties (except of course those directly affiliated with the industry, or those who have a major infrastructure project scrapped due to insufficient funds eg. a desalination plant). While democracies with an expansive welfare state often suffer as access to social programs is dramatically expanded and reduced according to the vagaries of the market’s demand for their resource or commodity. Such an overreliance has led to significant failures in the past, this was seen in many Latin American countries that chose ISI development strategies, who boomed but crashed following the mobilization of the population, and shutting themselves off from foreign competition, that developed products which were inferior and did not generate demand on the foreign market after domestic mobilization. Dutch Disease is a little different, as it primarily involves resources. Below is a graph demonstrating the appearance of Dutch Disease in Canada, the decline of manufacturing which was a huge market in Canada in exchange for natural resource exploitation.
Ultimately Oil is a great example because it is subject to extreme vagaries, which also have significant impacts on oil-consuming countries. Following the Iranian revolution, gas prices skyrocketed in the United States, leading President Jimmy Carter to impose legislation mandating minimum fuel efficiency standards for American Vehicles, and significantly altering consumer demand. More recently gas prices skyrocketed in the late 00’s leading President Bush to pass 2007 EISA (Energy Independence and Security Act). This was to use corn ethanol to decrease domestic reliance on foreign oil, as the United States was caught in multiple foreign entanglements in the Middle East, and diplomatic ties with the Hugo Chavez Regime in Venezuela were turning sour. Furthermore, the consequences of Dutch disease can be seen in the Venezuelan economy which was highly dependant on oil as it made up 87% of exports. Once the richest country in South America, it now has extreme hyperinflation, a population of close to 90% below the poverty line, problems with food shortages, all while having the richest proven oil reserves in the world.
Venezuela was overly reliant on oil, and engage in unsound economic policy, it nationalized all oil producers and discouraged all foreign investment in the country. Meanwhile, it’s neighbor Trinidad and Tobago has used the oil in the country to become one of the richest countries in the Caribbean. Trinidad and Tobago, is starting to show signs of Dutch Disease but given the smaller size, it is better able to ameliorate negative consequences that arise from the problem. Something unprecedented occurred in the United States in the United States that led to the precipitous decline of Venezuela.
The Shale revolution led to a boom in US oil production, today the United States now produces more oil than both Russia and Saudi Arabia.
OPEC countries tried to engage in a price war with the United States to make it unprofitable for US producers and shut them out of the global market. This backfired, the United States weathered the storm and oil prices fell to historic lows, countries that suffered from Dutch Disease dependance on oil took the worst hits notably Venezuela, from its socialist policies, lack of alternative industries, it ran out of other people’s money to spend, and it’s economy faltered. Today we are seeing one of the worst exoduses in history from the country. This concept ties into distributed network theory if you have a variety of nodes, and one fails others can still function (albeit in some cases at a reduced capacity). A single centralized node be it government or the economy, if it fails is catastrophic. This is a danger that is seen from too much-centralized power in the economy or in government, citizens of the world beware.
Dangling Woo Li Master 