WHEN anything goes wrong, there are always two explanations: blame it on bad luck or poor judgment.
When an economy does badly in terms of poor rates of growth or inflation, economists put the blame on shocks: external or internal.
When an economy does well in terms of high rates of growth or low inflation, economists attribute the performance to positive shocks: external or internal.
The external shocks, either negative or positive, are beyond the control of any government. The negative external shocks include steep oil price or recession.
Increase in international oil price leads to imported inflation, as oil is the real lubricant of the economy. Recession overseas reduces employment and incomes, resulting in less tourist arrivals for countries depending on tourism and less remittances.
Internal shocks are also of two kinds: negative and positive. Negative domestic shocks include natural disasters, destroying productive base. Positive shocks include discovery of mineral resources which add to productive resources or improvements in productivity of labour through education and training. These positive shocks are because of good policies of government, contributing to an investor friendly environment.
Fall in commodity prices What if an economy with a rich endowment of mineral resources does badly for last two years, since 2014?
Could it blame the fall in oil price: from $US100 ($F200) a barrel in 2014 to $US45 ($F95) a barrel in 2016?
In fact, such falls in commodity prices and decline in export earnings are not new. They happen to be part of cyclical disturbances. Good times being followed by bad times have been given a name as well: resource curse!
A mild label will be Dutch disease. The term disease indicates possibility of cure.
The resource curse is a stronger description of a possible no-return to normalcy situation. The term Dutch disease has its origin from the Dutch economic crisis of the 1960s following the discovery of North Sea natural gas.
As exports of the newly discovered resource brings a windfall in gains, value of the domestic currency increases.
This appreciation of domestic currency hurts the competitiveness of traditional exports. Their decline leads to closure of the traditional export industries, resulting in unemployment and fall in incomes.
The appreciation of domestic currency also leads to increase in imports of cheap goods from overseas which would lead to killing of domestic industries which would shift to other countries.
This process of de-industrialisation also pauperizes the nation. Thus, a discovery of rich resource, a blessing initially, can turn out to be an ultimate curse.
History has some lessons: in 2009, United Arab Emirates hade huge increase in oil revenue. The windfall profits went into the property sector, which actually led to a boom but only to get busted soon. On the other hand, Saudi Arabia which went through an oil boom phase in 2010 avoided the bust by restricting lending to housing sector.
If lessons are learned and appropriate policies are formulated and implemented vigorously, the Dutch disease is not only curable but also preventable in the future.
* Professor Jayaraman teaches at FNU, Nasinu campus. His website is: www.tkjayaraman.com
