Dutch Disease is an economic term used to describe the negative consequences that can result from an increase in the value of a country’s currency. It is most often associated with the discovery or exploitation of a valuable natural resource and the unexpected impact this discovery can have on the country’s economy. The term was coined by The Economist in 1977 in an analysis of a crisis that occurred in the Netherlands following the discovery of large deposits of natural gas in the North Sea in 1959. The newfound wealth and massive exports of natural gas led to a sharp appreciation of the guilder – the Dutch currency until 2002 – making exports of all non-oil products and services less competitive on the international market.
The phenomenon typically occurs following an increase in exports associated with natural resources, which results in a substantial inflow of foreign currency.
In this situation, there is a tendency for the national currency to appreciate, as there is greater demand for the country’s currency to carry out commercial transactions.
Although appreciation may seem positive at first glance, it can have negative effects on other sectors of the economy unrelated to the sector in which economic growth has taken place, with the agriculture, production and transformation industries generally suffering the most.
With the appreciation of the national currency, products not related to the exploitation of natural resources become less competitive for foreign buyers, resulting in a reduction in exports of these other products, harming sectors not directly related to the resources in question.
On the other hand, the strengthening of the national currency leads to greater purchasing power for resident economic agents at an international level, thus making imported goods and services more competitive and further discouraging local production.
These trends, combined with currency appreciation and the concentration of wealth in the natural resources sector, can lead to progressive deindustrialisation.
Investment in other sectors of the economy tends to decline, as attention and resources are concentrated on exploiting and exporting the respective valuable resources.
This deindustrialisation results in a growing dependence on the natural resources sector, increasing the economy’s risk and exposure to economic cycles.
Countries that depend on a limited set of natural resources are more exposed to economic volatility
Countries that rely heavily on one resource, or a limited set of natural resources, are therefore more exposed to economic volatility due to fluctuations in the international prices of that resource(s).
If the price of that resource(s) on the global market falls substantially, the country could enter a deep economic crisis, as a large part of its income, generated from the exploitation of that resource, also reduces significantly.
In addition to the economic implications, the exploitation of and dependence on natural resources can have social and political effects.
The wealth generated and its concentration tend to lead to economic and social inequalities, increasing the risk of corruption and conflicts over the distribution of resources. The management of resources and their equitable distribution become crucial issues for a country’s political and social stability.
Countries such as the United Kingdom, Canada and Russia have suffered the effects of Dutch disease due to the strong expansion and exploitation of their natural resources.
The experience of several countries that have already faced this reality has led to the development of measures to mitigate the effects and risks associated with Dutch disease, such as: favouring economic diversification; adopting a flexible exchange rate regime; fiscal policies focused on controlling inflation; investing in public services; encouraging savings and investments and promoting education for residents; creating sovereign wealth funds, among others. Implementing these strategies can help countries manage the challenges associated with Dutch disease and promote sustainable development.
In Mozambique, with the discovery and exploitation of natural gas megaprojects in the Cabo Delgado region, although the country is also exposed to the risks of Dutch disease, there are mitigating factors.
In particular, it should be noted that the shareholders in these projects are mostly multinationals, and the revenues expected from the exploitation of the gas will, to a large extent and in the first instance, be used to pay for the financing of the project, thus not directly entering the Mozambican economy.
On the other hand, the revenues that will be allocated to the country in the first few years, mainly in the form of royalties, will be channelled partly into the State Budget, with the government being responsible for deciding their allocation, and the other part into the Sovereign Fund, created recently and specifically to deal with some of the risks of Dutch disease, with the aim of preserving wealth for future generations.
