CHAPTER 4 THE DUTCH DISEASE AND THE RESOURCE CURSE

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development, and Investment (Apr 2019)
CHAPTER 4
THE DUTCH DISEASE AND THE RESOURCE CURSE
Keith B. Hall
Director of Mineral Law Institute, Louisiana State University
Stephanos Gulbraar Orestis
Corporate Compliance Officer, Equinor Energy do Brasil Ltda.
Peter Leon
Africa Co-Chair, Herbert Smith Freehills LLP
Aaron O'Connell
Hogan Lovells
Julia La Manna
Hogan Lovells

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KEITH B. HALL is Director of the Mineral Law Institute and the Campanile Charities Professor of Energy Law at Louisiana State University (LSU). He teaches Mineral Rights, Advanced Mineral Law, International Petroleum Transactions, Civil Law Property, and an Energy Law Seminar that focuses on environmental issues relating to oil and gas development. His publications have focused on oil and gas leases, pooling and unitization, hydraulic fracturing, and induced seismicity that is associated with oil and gas activities. He is co-author of a textbook on oil and gas law that is used in U.S. law schools and also is co-author of a book published by the American Bar Association on the legal issues relating to hydraulic fracturing. He is a frequent speaker at national and international oil and gas conferences and is a contributing co-author to the forthcoming new edition of a leading textbook on international petroleum transactions. In prior years, Professor Hall has taught International Petroleum Transactions as a Visiting Professor at Baku State University in Azerbaijan, International Energy Transactions as a Visiting Professor at the University of Pittsburgh Law School, and Introduction to Mineral Law as an adjunct professor at Loyola Law School in New Orleans. Before joining the LSU Law School faculty, he practiced law for 16 years, with a focus on oil and gas litigation and transactions. Professor Hall is the Editor-in-Chief of the Institute for Energy Law's Oil & Gas E-Report. He serves on the Rocky Mountain Mineral Law Foundation's Trustees Council, the Association of International Petroleum Negotiators' Educational Advisory Board, and the Executive Committee of the Energy & Mineral Law Foundation. He is a former Chair of the Oil & Gas Committee of the American Bar Association's Section of Environment, Energy and Resources. He also is a registered professional engineer.

PETER LEON is a partner and Co-Chair of the Africa Practice Group at global law firm Herbert Smith Freehills and is based in the firm's Johannesburg office. Peter is one of the world's pre-eminent mining lawyers according to the International Who's Who of Mining Lawyers and other peer reviewed global legal directories. His areas of expertise include crisis management, mineral and petroleum regulation in developing countries (including international best practice), resource nationalism, black economic empowerment and indigenisation law, international investment law and investment protection. Peter regularly advises clients on major mine development agreements and resources regulatory issues across Anglophone Africa. He also has significant experience in contentious matters involving States in sub-Saharan Africa. He is particularly skilled in crisis management and has provided expert advice on an urgent basis to clients to assist them in managing and mitigating significant country risks. Peter is well versed in the sub-Saharan African geopolitical climate and provides strategic advice not only on issues related to the mineral regulatory framework but also how to navigate the framework within the prevailing economic and political conditions in key African mining jurisdictions. Peter is also an accomplished speaker and a regular presenter and panellist at conferences, courses and Parliamentary hearings in South Africa and internationally. He has written extensively on the topics of mining, resource nationalism, the regulation of foreign direct investment, and black economic empowerment and indigenisation law and is an honorary lecturer at the University of Dundee in Scotland's Centre for Energy, Petroleum and Mineral Law and Policy.

I. INTRODUCTION

When oil, natural gas, or some other valuable resource is discovered in a country, the people of that country often celebrate, looking forward to a resource boom that will yield benefits and significant opportunities for the entire nation. Such optimism is natural. People are hopeful that the upcoming resources boom will be well-managed, but even if the boom is not well-managed, the country should still benefit. Poor management should merely reduce the level of gain, and society should still be better off than before.

But experience shows that, when countries experience a resource boom, they often achieve a rate of economic growth that is lower than the rate of growth achieved by countries that have not experienced a resource boom. Further, countries experiencing a resource boom sometimes see an increase in corruption. Indeed, according to some studies, countries with a resource boom have a higher likelihood of civil war or armed strife.

Numerous authors have noted that this phenomenon seems paradoxical¹ --indeed one of the names given to this phenomenon is the "Paradox of Plenty."² More commonly, people use the terms "Resource Curse"³ or "Dutch Disease"⁴ to refer to this overall phenomenon or to certain

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features of it. This paper explores issues relating to this paradoxical result, including the nature of the problem, the experience of particular nations, theories about the causes of this Resource Curse, and policy initiatives to avoid or minimize the problems associated with the Curse.

II. DEFINING THE PROBLEM

The natural assumption that increased mineral wealth begets improved long-term economic growth is challenged by the casual observation that many resource-rich nations experience stagnated growth. Relatedly, when the 1960s Netherlands gas boom was followed by a dramatic manufacturing sector decline, economists theorized that resource wealth may not be the growth boon it has been widely perceived to be. These issues--since dubbed the "Resource Curse" and "Dutch Disease", respectively--present interesting and challenging economic, policy, and legal questions.

This section provides an overview of Dutch Disease and the Resource Curse. It first describes the basic theory and economic modeling of Dutch Disease, and addresses the mixed empirical research that has been conducted in an effort to understand the ailment. Next, this section provides an overview of the Resource Curse, and introduces certain competing conceptions about its true nature.

A. "Dutch Disease" and Its Symptoms

"Dutch Disease" describes the theory that increases in natural resource revenues correspond with decreases in other sectors, most notably manufacturing and agriculture.⁵ The name derives from the 1960s Netherlands gas boom, which was followed by a sharp decline in manufacturing.⁶ The traditional Dutch Disease theory posits that booms in the natural resources sector cause structural production changes, including stagnation or even decline in other tradable sectors.⁷

The core economic model of Dutch Disease typically divides the economy into three sectors: the booming natural resource sector, the lagging non-resource tradable sector (such as manufacturing or agriculture), and the non-tradable sector (such as construction and other domestic goods and services).⁸ Decline in the non-resource tradable sector can be explained by either the spending effect or the resource movement effect. Under the spending effect theory, increased

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income from the boom increases spending and demand in the non-tradable sector, driving up prices in that sector. This strains the lagging sector's profit margin because their domestic costs have gone up yet prices for non-resource tradables remain at global levels.⁹ The resource movement effect occurs because the booming sector induces capital and labor away from the lagging and non-tradable sectors.¹⁰ This movement causes output in the non-resource tradable and non-tradable sectors to decline.¹¹ These theories, and others, are treated more comprehensively in Part IV.

Two researchers summarize that, taken together, the spending and resource movement effects give rise to four predictions, or symptoms, associated with Dutch Disease.¹² First, because the price of non-tradables (i.e., services and domestic goods) increases, the real exchange rate will likewise increase (that is, the price of non-tradables will increase relative to the price of tradables, whose price is set by a world market)¹³ Second, output and employment in the non-resource tradables (i.e., manufacturing or agriculture) sector will decline.¹⁴ Third, depending on the amount of employment created by the natural resource sector and the degree of labor mobility present in the nation, there may be an increase in non-tradable sector output and employment.¹⁵ Note, though, that this third symptom would occur only where the spending effect outweighs the resource movement effect. Finally, if the degree of labor mobility is relatively high, overall wages will increase.¹⁶

The empirical research investigating whether Dutch Disease actually exists is somewhat mixed. As a threshold matter, it has been shown that an increase in the ratio of a nation's export prices to its import prices increases real exchange rate appreciation in natural resource-rich nations.¹⁷ There is also some support for the conclusion that such terms-of-trade shocks and consequent real appreciation shrink the manufacturing sector. For example, Kareem Ismail models Dutch Disease in oil-exporting countries with a focus on structural factors including relative factor intensities and cross-country mobility.¹⁸ His work concludes that a 10 percent increase in oil windfall is associated with a 3.4 percent decline in value added across industries and a 3.6 percent

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decline in industrial output.¹⁹ This impact is greater in open capital...