1. Team: ArtemChepurnoy Vera Lazarenko DmitriyKovalenko DmitriyAsinovskiy EvgeniaBelova Dutch disease (resource curse) Impact on international competitiveness

2. What is the Natural Resource Curse? Many developing countries with abundant natural resources experience lower rates of economic growth and development than countries with few natural resources

3. “Dutch Disease” The Economist (1977) 1960s – Discovery of large natural gas deposits in the North Sea Subsequent shift in resources and decline in the manufacturing sector

4. Dutch Disease1970s: Netherlands Influx of revenue from natural gas led to increasedspending on social programs

5. Dutch Disease1970s: Netherlands “Crowding out” of manufacturing led to lost jobs Creation of “safety net” social programs resulted in high levels of unemployment and disabilities

6. Netherlands: Export Performance Researches concerned about the reasons of worsened export performance

7. How does it work? Cordon and Neary model, 1982

8. The Specific Factor Model TRADABLE Manufacturing Energy/Mineral WORLD ECONOMY COUNTRY ECONOMY NON-TRADABLE

9. The Specific Factor Model 𝑝(𝑡) = 𝑐𝑜𝑛𝑠𝑡 – relative international prices for tradable goods are fixed 𝑝(𝑛) – price for non-tradable goods is determined by demand and supply

10. The Specific Factor Model TRADABLE Manufacturing Manufacturing-type capital Energy/Mineral Labor Natural resources NON-TRADABLE Non-tradable-type capital

11. The Specific Factor Model Each sector uses two factors of production: 𝑌𝑖=𝑌𝑆𝐹𝑖,𝐿 𝑆𝐹𝑖 - specific factor of production for sector 𝑖 𝐿 - labor, which is perfectly mobile among sectors The real wage is perfectly flexible

12. Spending effect There is a boom in mineral sector, which increases country GDP and thus demand in the country 𝑌𝐷. Let’s suppose, the demand increases equally on manufacturing and on non-tradable products.

13. Manufacturing goods market 𝑃 𝑃 𝑄 𝑄1 𝑄2

14. Non-tradable goods market 𝑃 𝑃2 𝑃1 𝑄 𝑄1 𝑄2

15. Spending effect So, the price for non-tradable goods rises in terms of tradable goods This makes production of non-booming tradable goods less attractive for domestic producers Finally, tradable goods (manufacturing) sector narrows

16. Factor reallocation effect 𝑤 𝑤 𝑉𝑀𝑃𝐿𝑌 𝑉𝑀𝑃𝐿𝑋 Manufacturing industry (Y) Mineral industry (X) 𝑤2 𝑤2 𝑤1 𝑤1 𝑂𝑥 𝑂𝑦 𝐿1 𝐿2 Labor distribution

17. Factor reallocation effect Labor force moves from the manufacturing industry, so the industry lacks for labor Cost of labor increases for manufacturing industry So, this effect squeezes profitability and output of the manufacturing industry Decreased global competitiveness of manufacturing sector due to high domestic input prices In some cases, foreign producers may enter the market and drive down prices to level where domestic producers cannot compete

18. Effects of resource curse: practical implications Market effect Exchange rate appreciation Price volatility, discouraged FDI Demand for labor, capital, goods Deflected entrepreneurial activity Government spending Social programs Political Rent-seeking and corruption Social Capital Formation Savings False sense of security High inequality Change in economic incentives of individuals

19. Effect on wealth creation: Change in economic incentives of individuals Engage in entrepreneurial activity in other sectors Gain a share of the wealth of booming sector: industry's growth is usually limited by the availability of the resource (size, rate of usage) cannot be expanded by having resources being put into it Competing for a larger share of a pie of fixed size

20. Symptoms and diagnosis Mineral wealth’s correlation with: Appreciation of the real exchange rate Civil wars Low economic diversification/growth Authoritarianism/poor governance & weak institutions High inequality

21. Dutch Disease: Impact on International trade and competitiveness

22. International Competitiveness Analyzing of macroeconomic performance Explaining of international trade trends Main factors: technologicalinnovation degree of product specialization the quality of the products involved, or the value of after-sales service high rates of productivity growth

23. Measures of international competitiveness Difficult to measure No unique approach Criteria: Cover all sectors Encompass all the markets Fully comparable internationally data

24. Measures of international competitiveness Import Competitiveness (IC) Export Competitiveness (EC) Overall Competitiveness EC* + IC* INTERLINK Model explains changes in countries’ changing in exports

25. Diseased countries Nigeria Azerbaijan Russia Norway Botswana VS

26. Nigeria First oil found in 1956 by The Shell D’Arcy

27. Nigeria: 1960-1970 GDP 54% Total Export Earnings Agriculture 51% Employment 72%

28. Nigeria: since 1970 GDP 54% Total Export Earnings Oil 91% 10% Employment 70% Agriculture

29. Nigeria: problems Huge external debt High unemployment Overdependence on oil Huge public expenditures Corruption Money wasted

30. Russia Ratio of Hydrocarbon Exports to Gross Domestic Product, 1992–2005

31. Russia 1991-1998 Russian manufacturing industry: -56% Machine building and metalworking: -64% Timber, woodworking, paper industry: -66% Building materials: -70% Light industry: -89% Food processing: -47% Crude oil output: -32% Gas output: -15% As a result, additional hydrocarbon resources were freed up for export. Thus, Russia experienced the onset of the “Dutch disease” in 1992–1998.

32. Russia

34. Growth of oil sector share in economy

35. Sharp government expenditure growth and especially growth of investments in non-tradable sectoroil time

36. Azerbaijan GDP dynamics and structure

39. Money come from the oil sector

41. Norway

42. Norway and oil discovery No harm to non-oil sectors Economical development Used government policies to avoid DD

43. Norway’s policies to avoid DD Pay back foreign debts when possible Invest abroad Encourage domestic accumulation of instead of using foreign specialists Channel resources into education, research and development Putemphasisonknowledge, technological progress, and human capital Stimulate female participation in the labor market

44. BOTSWANAEVIDENCE & EXPLANATION OF EXCEPTIONALISM Sustained economic growth and socio-economic development since 1966 Mineral wealth Good macro-economic management Good governance and institutions

45. Evidence 1: Sustained economic growth since 1967

46. Evidence 2: Sustained socio-economic development

47. Explanation 1: Mineral wealth - diamonds

48. Explanation 2: Good macro-economic management Successful in utilizing the financial capital from mining to drive and sustain economic growth and development. Popular explanation: country’s sound macro-economic objectives and policies

49. Explanation 2 Two objectives adopted very early: Avoidance of external debt and stabilization of government expenditure Management of the exchange rate in order to promote economic diversification

50. Explanation 3: Good governance and institutions A functioning constitutional multi-party democracy since 1966. Enduring social and political stability Free media Quality and respected governance and watchdog institutions

52. weak development of the non-mining private sectorHigh inequality(Ginicoefficient - 0.56, 1980-1998) Increasing expenditure on public consumption (from 0.84 in 1995 to 1.08 in 2007).

53. Trends in economic sector shares, 1966-2005 (Based stats from Siphambe, 2007, p.3)

54. COMPOUNDING FACTORS Geographic isolation – landlocked deep into the interior of Southern Africa Drought proneness, soil infertility agricultural development challenging Small domestic market SACU free trade area membership HIV/AIDS Anyway, Botswana has so far largely succeededin fighting resource curse

55. Any treatments for “Dutch Disease”? Primary concern of financial institutions (World Bank/IMF): “Democratic, consensual and transparent processes” (Stiglitz) Anti-corruption programs Assistance of Western governments Stabilization funds

57. create a stable revenue stream

60. Any treatments for “Dutch Disease”? II. Boosting the competitiveness of the manufacturing sector Investing in education and infrastructure BUT NOT PROTECTIONISM! selling rights to natural resources, subsidizing other industries imposing tariffs on imported goods

61. Conclusion Natural resources: curse or blessing?

63. References Booming sector and Dutch Disease Economics: Survey and Consolidation, W.M. Cordon, Oxford Economic Papers, 1984 Boom and gloom. Azerbaijan's economy, drunk on oil, is suffering rapid - inflation, The Economist, 2007 “Diagnosing Dutch disease: Does Russia have the symptoms?”, Oomes N., Kalcheva K. (2007) International Monetary Fund “Dutch disease and Azerbaijan economy”, Hasanov F., Econimics Education and Resource Consortium , Baku, 2010 DOUBLE DIAMONDS, REAL DIAMONDS: BOTSWANA’S NATIONAL COMPETITIVENESS Jay van Wyk, Pittsburg State University, Academy of Marketing Studies Journal, Volume 14, Number 2, 2010 Escaping the Natural Resource Curse and the Dutch Disease’, Larsen, E., 200, Statistics Norway, Research Department, Discussion Papers No. 377 Impact of Government Expenditure on Growth: The Case of Azerbaijan, Koeda J., Kramarenko V. , IMF Middle East and Central Asia Department, 2008 Indicators of international competitiveness: conceptual aspects and evaluation,” Durand M., Giorno C. (2008) , Organisation for Economic Co-operation and Development (OECD) Lessons from the Dutch Disease: Causes, Treatment, and Cures’, Gylfason, T., 2001, Institute of Economic Studies Nigeria: Petroleum Revenue Management, PREM Sector Unit, Sub-Saharan Africa region’, Washington DC, World Bank, 2004, The Primary Sectors of the Economy and the Dutch Disease in Nigeria’, Olusi, J., Olagunju, M., 2005, The Pakistan Development Review, Vol. 44 : 2,pp. 159–175 The Dutch disease in Russia: Macroeconomic and structural aspects,Problems of Economic Transition, Fetisov G. (2007) Vol. 50, Iss. 1, 2007, 53–73. THE DETERIORATION OF THE NETHERLANDS' EXPORT. PERFORMANCE DURING THE LATE 1970's: A MATTER. OF COMPETITIVENESS OR EXPORT STRUCTURE?, S. Brakman, C. J. Jepma and S. K. Kuipers, DE ECONOMIST, Volume 130, Number 3, 360-380 Trade in Minerals, Graham A. Davis, Division of Economics and Business,Colorado School of Mines, December 15, 2009