Dutch disease explained

DUTCH disease, called the resource curse or the “curse of oil”, is the damaging effect on an economy as a result of large inflows of revenue from the export of natural resources, especially oil and, now increasingly, gas.
The term is also used to refer to the effects of other inflows of revenue from any sources which cause currency appreciation.
This increases the cost (in foreign currency) of exports of the products of other industries, making them less competitive, such as might be the case with agricultural commodity products or export of PNG manufactured goods.
In addition, the increased demand for factors of production, needed by the hydrocarbon industry causing the problem, also raises prices and makes other industries less profitable. An example is that if there are lots of well-paid jobs in the LNG project, other industries, including the government, will face an exodus of workers and/or higher labour costs.
While such an outlook might appear beneficial, it may be harmful, in the long term, for a number of reasons:
*The exports (or remittances) may not be sustainable;
*In the case of the LNG project, prices, while guarded against, may be volatile, making reliance on a single commodity dangerous;
*The LNG project has much less growth potential than the agricultural, manufacturing and tourism industries that it displaces;
*The distribution of wealth may be uneven. Those within one industry can become dramatically better off while many others become worse off; and
*There are political and consequences such as increased corruption.
The Dutch disease also cripples the entrepreneurial spirit as it becomes more profitable to try to gain a share of wealth generated in one sector rather than try to engage in other activities.
Some cures to the “disease”, as experience in other countries, are for investment abroad rather than spending wealth; for increased transparency and accountability and using income from the one prospering industry to subsidise other industries.
The sovereign wealth fund, if designed and managed right, would be one such cure.
ExxonMobil, the developer of PNG LNG, was involved in a natural gas development in the Netherlands in 1959 which led to the term “Dutch disease”.
The term was coined in 1977 by The Economist magazine to describe the decline of the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959, culminating in the world’s biggest public-private partnership – N.V. Nederlandse Gasunie – between Esso (now ExxonMobil), Shell and the Dutch government in 1963.