Avoiding Dutch disease

To avoid the complications of Dutch disease, the challenge that policymakers will face is to maximize the long run, sustainable benefits of resource development to our citizens, but minimize its costs. In this regard, policy makers need to think about one set of policy measures that includes pro-active efforts to support investment, employment, innovation, and exports in targeted high-value sectors of the economy. Emphasis has to be placed on the quality of the value added.

Our focus must be identifying high-value or “strategic” sectors that add value to our resources; that generate more high-income, high-quality jobs; embody technology and innovation and contribute to greater success in world markets. The latter is especially important to us as we have suffered a dramatic fall in export earnings from a fall in price of oil and gas and the volume of production. We need to focus in increasing export earnings and generating foreign exchange.

To address Dutch disease, we need an economic plan that reduces reliance on the hydro-carbon exports, addresses balance of payments deterioration, poor productivity growth and low levels of innovations. We need to objectively assess the philosophical underpinnings and empirical results of free-market and free trade. The promise that “perfecting” the private sector (through trade deals, deregulation, tax cuts, and privatization) would usher in a new era of innovation, efficiency, and trade success needs to be assessed.

The literature suggests that in state-led industrialisation experience of several Asian and Latin American economies in contemporary times, with pro-active and interventionist policies, innovative, productivity-enhancing growth does, not occur spontaneously as a result of market forces. Instead, the “visible hand” of government intervention works.

Our long term plan that addresses the challenges of Dutch disease must include the targeting of subsidies, strategic trade interventions, active industrial strategies in high-tech industries and public ownership of key firms.

There is one critical issue that is especially important at this point which is finding the financing options needed for funding development. This will require finding a way to match unused liquidity in the financial system such as resources in pension plans, credit unions and the insurance sector to meet the needs of the country’s development.

It also has to be appreciated that an organic relationship exists between addressing Dutch disease and the Heritage and Stabilization Fund (HSF). The changes to the HSF can result in assistance to countering the effects of Dutch Disease. New rules about utilization of the rents from the hydrocarbon sector are needed.

If there is a dramatic increase in energy prices, would the possible dampening effect on appreciation be in our best interest? Is exchange rate intervention through the managed float distortionary? Certainly there are no easy answers but these must be found. At the end of the day we need to balance Dutch disease problems with oil income spending.

The truth is we know what must be done. What is missing is the political will to make it so.