Tuesday, April 8, 2014

Dutch Disease In The US? No

I came across a fascinating theory this week to explain why countries that are rich in natural resources tend to remain poor. This theory was actually first developed in 1977 and came to be known as "the Dutch disease." What brought this up the other day was that a leftist asserted it could happen to us because of all the drilling we are doing. Naturally, I don't buy it. Let’s discuss.

The theory I stumbled upon is really pretty fascinating and surprisingly obvious once you hear it. It goes like this: when countries start exporting natural resources like oil, gas and copper, other businesses in that country find themselves becoming less and less competitive. Why? Well, because the cash brought into the country from the sale of the commodities causes the value of the country's currency to soar. This means that goods produced in that country will now become more expensive relative to goods produced in other countries. Indeed, what the oil/copper/etc. wealth has done is put the country’s businesses and local labor at a serious disadvantage to the rest of the world and that will slowly strangle the rest of their economy, even though the country appears normal from the outside.

This is “the Dutch disease,” which is a term coined in 1977 for the relationship between the discovery of a large natural gas field in the Netherlands in 1959 and the subsequent decline of their manufacturing sector. As noted in 1977, this was seen as being the result of the Netherlands becoming less competitive because their currency became stronger compared to other nations because of the export of gas.

This is interesting on several levels. First, it explains why places like Russia are moving backwards economically despite the wealth they are taking in from all the oil, gas and minerals they are sitting upon. It also explains why so many third world countries have such problems, because they always try to sell their resources first to boost the rest of their economies, but in the process are hamstringing the rest of their businesses.

This also puts the lie to the left’s argument that these countries are poor because capitalists have exploited them. Between the 1960s and the 1990s, the left screamed about Western capitalists exploiting third world countries. The argument went that the capitalists would go into a third world country and pay far less than market value for the resources, thereby leaving these countries poor and without their resources. Believe it not, this wasn't hard for most people to believe, given that colonization seemed to be about exploiting these countries and that these countries always ended up remaining poor. This theory however, says that's not true. This theory tells us that the problem isn't insidious behavior, it's simple economics.

As an aside, the right had the perfect response to the left for decades. The right countered that it was corrupt governments and bad business cultures that squandered the wealth. The right also smartly pointed out that while the left whined that placing factories in these countries was exploitative because they didn’t pay western wages, the workers were typically thrilled to be making way more than other local jobs paid. Those are arguments the left never could beat.

Anyways, this argument came up vis-à-vis the US the other day. With the US now producing more oil and gas than Saudi Arabia, is there a danger of this happening here? The article I read felt it would happen here. I don't buy it though. And the reason I don't buy it is twofold. First, oil and gas are only a tiny fraction of our economy from an export perspective. Thus, they cannot cause the dollar to appreciate enough to trigger this effect. By comparison, the countries who have been hit hardest by this reality tend to be the ones whose only industry is exporting resources. More importantly, we aren’t exporting our oil and gas, we are using it. That means it's going to make everything in our economy cheaper. That will actually cause the inverse of the Dutch Disease effect with American businesses and labor becoming more competitive... not less. Said differently, this should spark an economy wide boom as energy gets cheaper for everyone. It is an interesting theory though.

Thoughts? Any other applications you can think of?


Koshcat said...

Norway seems to be doing pretty well. I think that alone drives a stake into the "Dutch Theory". Couldn't have come from too many social programs leading to high taxes causing those companies to leave? Or that they probably taxed the crap out of their own gas so it was cheaper to produce the product in China and import the fuel? No can't be. Those are all good things that people need and when you give people government money it magically multiplies.

Isn't by definition impossible to sell "below market value" since the market value is by definition the price someone is willing to sell to another party willing to pay?

AndrewPrice said...

Koshcat, I'm not sure Norway disproves it because throughout the 1970s and 1980s, Norway did the one thing that should counter the Dutch Disease -- they devalued their currency like mad. Plus, Norway was a mess until recently. I'd have to look deeper into how they've handled their oil field issues. But it generally true that places with oil, gas or lots of minerals are generally economic basketcases.

That said, I'm a 100% believer that taxes, regulation and other social spending will absolutely suppress an economy. The proof for that is just so obvious that no one outside of a doctrinaire leftist could doubt it... Paul Krugman, PhDuh.

On selling below market, you definitely can sell below market, but why would you is the question? Well, the left would answer, these governments got conned, bribed or threatened by big bad companies like Exxon into doing that. Of course, that's horsey pooh. These countries got everything they could and with a world price being readily available for commodities, it was easy to set the price. They just wasted the money on wars, mansions for el Heffe, statues of el Heffe, building buildings where there ain't no people, etc.

OMMAG said...

This seems to be a meme that is circulating around the leftard community.

Thomas Mulcair, Canada's chief leftard/marxist is the leader of the official opposition in our Parliament the NDP (communist party). Mulcair offered up the Dutch Disease canard as an attack on free market proponents and specifically our governing Conservative party.

He was promptly laughed out of the limelight as most Canadians have the sense to know that it is regulation (government meddling) and taxation (government theft) that killed the Dutch economy. We know this because we have over 40 years of experience while we worked our way out of the hole that the federal Liberal Party dug for us.

Dutch Disease? Just another commie fantasy to scare ignorant peasants and nervous children.

tryanmax said...

That's a perfect leftist theory, because it is just convoluted enough to sound smart without being so convoluted that it's not easy to grasp. Unfortunately, that's the kind of theory that catches on because it makes dumb people feel smart. It's hard to convince people of the "obvious" b/c no one wants to believe the eternal problems are so "simple"--as if there was anything simple about corrupt human nature.

This dovetails to something I was pondering on my commute. If anyone dares assert that regulation stifles an economy, you'll often hear demands from big government sycophants to name a specific regulation that does that. (Often it's more specifically related to jobs.) I've often looked to analogy for my answer, asking which string of the net catches the fish? (or tiger, or whatever) But what if there is a more concrete answer. Where would one find it?

AndrewPrice said...

OMMAG, Actually, the theory itself appears sound -- though it seems like a rare occurrence. In fact, it's entirely consistent with basic economics: profit in one sector raises currency value. Raising currency value hurts manufactures. Both of those ideas are solidly conservative.

The issue is application. For one thing, it appears to only matter in economies that are heavily skewed toward having just the one industry or where the one industry is so large that it dwarfs everything else, as has been the case in most Third World countries in the past -- though that is changing. It's effects can also be reduced by devaluation. Interestingly, this does seem to be occurring in Russia right now.

If the left is using this, and I haven't heard them do so yet, then they are simply latching onto an idea and misapplying it as yet another attack on drilling. Conditions in the US certainly aren't right for this to occur. As for Canada, I'm not sure what shape your economy is in at the moment, but I doubt it would happen there either.

Also, if the left is using this, then they are stupid because what the theory tells us is that (1) capitalists were not at fault for the troubles of Third World countries, i.e. there was no exploitation, and (2) diversification is important, which means the selection of national champions is a bad idea.

AndrewPrice said...

tryanmax, I would phrase that this way -- it's a perfect theory for the left to abuse. It's the same way they talk about "market principles" these days when what they are really saying is "we used businesses to impose socialist ideas." Think back to Tucker's argument from yesterday. She whined that Obamacare is conservative because it used the free market and created "demand," etc. She misused every one of those terms, but that is what the left has learned -- steal the terminology that people accept.

The issue here is that the theory makes sense, but has very limited application. But I can see the left whip this out as an argument against free trade or against whatever industry is in the cross-hairs. That's certainly something to push back against.

In terms of pointing out regulations that stifle business, how about the Obamacare ban on doctor's owning hospitals? The minimum wage and the disappearance of whole professions... like gas monkey.

tryanmax said...

IDK, those are tough. On doctors owning hospitals, the counter is that there are still hospitals regardless and doctors shouldn't own them because reasons. And how are you going to promote gas monkey jobs to people who think that the kid who can't refigure my $4.97 change after I give him 3¢ is worth $15.00/hr.?

I need example like how some regulation prevented the opening of a sustainable, renewable, green snuggie factory that would employs migrant single mothers. But that's usually where the cronyism steps in.

AndrewPrice said...

Your best bet then would be some sort of banned product.

AndrewPrice said...

tryanmax, I've been thinking about this and I need to push back on your response. What you've done is set up an impossible situation because the people you are talking about are essentially dismissing the example of doctors owning hospitals by saying, "I trust the government had a reason." But that's a response they can give for anything you uncover.

What you need is to flip around on them: "What reason can there possibly be for the government to say that insurance companies can own hospitals, but doctor's can't? Did you know that doctor-owned hospitals are cheaper for patients?"

Similarly, if you come up with a list of banned products or jobs that vanished, you need to come up with that second step right away because no matter what you say, they will respond with "well, I guess there was a reason."

tryanmax said...

Trust me, it's not a situation I've set up, it's one I've dealt with.

AndrewPrice said...

I understand that, but what I'm saying is that there is no answer the way this is posited because the denialist answer "I trust the government had a reason" will always be an out.

You either need to find a way around that, or just dismiss these people as mindless followers and give up on them.

tryanmax said...

Just so I don't come off as a Debby Downer, what you point out about the Dutch Disease would come in really handy against those who pooh-pooh "all of the above" energy solutions. This is a case where liberalism paints itself into the corner if the pundits and politicians can realize it.

Tennessee Jed said...

the theory is rational, but as you say, unlikely. I tend to be more of a believer in the so-called Austrian school of economics. I think Keynes has largely been discredited thanks to people such as Henry Hazlitt. What I like about the Austrian School and proponents such as F.A. Hayek is the recognition that macro-economics is so complex, models from the past have a difficult time proving accurate in the future. We are at a time in our country's history remarkably similar to the Great Depression. I recommend Amity Schaies book "The Forgotten Man" as an indicator of how the new deal prolonged and worsened our situation.

AndrewPrice said...

Jed, I prefer the Austrian school as well. In terms of macro-economics, I think there are some general principles that do apply: raise costs (taxes, regulation) suppress activity. Lower costs, increase activity. Borrowing to spend money is at best a wash. Spending money tends to distort the market and cause problems, as does things like targets in the tax code.

On the Dutch theory, I think it is rational, but rare and probably requires a fairly extreme set of circumstances. I can see this applying in Russia or Saudi Arabia today, but not in a developed economy like ours.

On the Great Depression, what I keep finding spooky is the chart that people keep pointing to (can't find it at the moment) which shows the stock market repeating the Great Depression point by point... with the worst yet to come.

AndrewPrice said...

tryanmax, Definitely. This is just more evidence that diversification is the key to economic success in all areas.

Joel Farnham said...


I can see this happening in a one lung economy country where the socialist/marxist/dictatorship holds sway. It is similar to what happens to most lottery winners. They spend all the money on doodads and the latest sports car rather than using the money to create a business to keep the money coming or investments that are not part of the one lung economy.

AndrewPrice said...

Joel, I think that is the exact environment in which this could happen. I don't see it happening here at all. So while this an interesting theory that may explain (partially) what is wrong in places like Saudi Arabia, it doesn't apply here.

Jon said...

A rising tide lifts all boats.

AndrewPrice said...

Not all boats, Jon. The SS Pelosi only floats when everyone is poor and suffering.

Jon said...

Oh...I know that one. Wasn't it a big floating artificial island of garbage floating up and down the coast?

AndrewPrice said...

I remember that. I'm pretty sure that according to religious texts, that signified her birth. ;-P

AndrewPrice said...

There won't be an article tonight. There is one at the film site however.

Critch said...

When I was a stockbroker I could always tell a sophisticated investor from a dabbler. The dabbler would jump on every rumor and put all their money in the hottest area of the week....the sophisticated investors spread their money out, knowing that it is impossible to predict everything, they always wanted at least part of their money working right at any time. I live in a small city that does a good job of balancing tourism, manufacturing, agriculture and the medical industries. Its no different with countries, if they have no sophistication they will put all their eggs in one basket at the expense of the chickens. My niece works for the State Department and she works in Eastern Europe trying to help those people develop small businesses...but as she said one night, about the only people in the old Soviet Bloc who understand free enterprise are the criminals.

AndrewPrice said...

Critch, Diversification is always the key to long term success. It's amazing how many people either don't know that or refuse to do it. I guess the gambling instinct says "put it all in one shot."

I've heard that too about Eastern Europe, that only the criminals understand free enterprise. Sad.

OMMAG said...

Andrew Price .... you are correct. That is exactly what the Marxist buffoon did. He used false argument and straw man to justify his demands that our oil and resource industries be stifled by the government through regulation.

He was subsequently mocked by all but the most ignorant and the most ardent on the left.

The left are using this meme to justify anything they see as prosperity.

Oh .... our economy is doing pretty good .... best in the G7 if I am not mistaken.

AndrewPrice said...

OMMAG, Unfortunately, leftists are very good at stealing ideas and labels and distorting them beyond recognition.

It doesn't surprise me that leftist Canadians would want to stop your oil industry because it's giving a lot of power to your more libertarian west.

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