Thursday, December 10, 2009
Economist's Notebook: Dutch Disease
The term 'Dutch Disease' in economics refers to an incident that occurred in the Netherlands: in 1959 a massive natural gas field was found beneath the North Sea. What was supposed to be a boon for the Dutch economy, massive revenues for the exportation of this gas to other countries, turned out to have an unanticipated side effect. Countries that wanted to buy the gas needed the Dutch currency, the Guilder, to pay for it. Demand for Guilders rose substantially and the price of the Guilder rose - the exchange rate increased. Because it now took more Dollars (or Pounds or Deutsche Marks) to buy a Guilder, this made all Dutch exports more expensive on world markets. Suddenly, Dutch manufacturers found themselves at a competitive disadvantage and the manufacturing sector in the Netherlands declined. Whether the causal relationship is as tidy as the story would like is a matter for some debate, but it strongly suggests the possibility that what was supposed to be a boon, ended up being a double-edged sword.
As an aside, the more general 'Resource Curse' story is familiar in development economics for many developing countries economies started with the exploitation of natural resources. But in the developing world concentrated natural resource wealth has also been associated with conflict and concentration of pow: if there is but one gold mine in a country, for example, everyone knows who controls it controls the wealth and thus the country and it often makes for irresistible temptation.
Ed Glaeser, in his continuing series of interesting articles for The New York Times wonders whether a similar "resource curse' can be told of cities as well, after all just look at Buffalo and other former great industrial cities that are now a shadow of their former selves. Does too much of a single good thing retard the development of other sectors?
This is particularly relevant in Portland as a city and Oregon as a state: did over reliance on timber retard the development of other industries, did it distract the state from education as decent jobs were abundantly available for young unskilled workers? Perhaps.