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.


Jeff Alworth said...

Have economists discovered ratios that point to the Dutch Disease--like if a single industry occupies more than 50% of an economy (or 33% or 67% or whatever)? And if so, do you know what percentage of Oregon's economy was dominated by logging?

My guess is that logging wasn't so dominant--farming, ranching, and commercial fishing (the extractive industries) together once dominated the market, but I don't know that forestry was such a huge part of the whole extractives pie.

Rebecca Davies said...

Detroit is the poster child for single-industry dependence. Its physical design, with a substantial car-based, suburban orientation, reflects its reliance on the auto industry. Now it not only has to retool its economy but it has to reconstruct urban infrastructure to suit, which are not easy to accomplish in tandem.

For probably a variety of reasons, Portland has not suffered in this regard and continues to add population at a rapid pace, unlike the shrinking cities of Buffalo and Detroit. My question then is: If the declining timber industry factors heavily in current unemployment or underdevelopment of other industries (and educational investments), then why has Portland been able to fare better than classic rust belt, single-industry cities? I also view it as a matter of degrees of over-dependence, as Jeff Alworth suggests. Small Oregon towns (and small towns in general) are generally better examples of the consequences of single-industry reliance.

An interesting related piece at the state level is the payouts to states with claimed timber interests, of which Oregon is an increasingly small recipient after being one of the major beneficiaries of the law to compensate for timber industry losses as a result of wildlife conservation legislation:

I wonder weather the payouts are helping develop other industries or functioning as an endless lifeline to subsitute for the timber industry. I suspect the latter.