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Dutch Disease
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1NC Shells
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Aid Module
Turn – Dutch Disease – Aid chokes off the export sector, leading to Dutch disease
and stifling growth
Moyo, international economist with a PhD in Economics from Oxford, 9
(Dambisa, Dead Aid: Why Aid is Not Working and How There is a Better Way For Africa,
http://www2.fiu.edu/~ganapati/6838/02_15_10_Moyo.pdf, p. 62-4, Accessed 7-10-13, RRR)
Aid chokes off the export sector
Take Kenya. Suppose it has 100 Kenyan shillings in its economy, which are worth US$2. Suddenly,
US$10,000 worth of aid comes in. No one can spend dollars in the country, because shopkeepers
only take the legal tender - Kenyan shillings. In order to spend the aid dollars, those who have it
must convert it to Kenyan shillings. All the while there are only still 100 shillings in the economy;
thus the value of the freely floating shilling rises as economy as people try to offload the more easily
available aid dollars. To the detriment of the Kenyan economy, the now stronger Kenyan currency
means that Kenyan-made goods for export are much more expensive in the international market,
making the traded goods sector uncompetitive (if wages in that sector do not adjust downwards). All
things being equal, this chokes off Kenya’s export sector.
The Silent Killer of Growth
This phenomenon is known as Dutch disease , as its effects were first observed when natural gas
revenues flooded into the Netherlands in the 1960s, devastating the Dutch export sector and increasing
unemployment. Over the years economic thinking has extended beyond the specifics of this original
scenario, so that any large inflow of (any) foreign currency is seen to have this potential effect.
Even in an environment where the domestic currency is not freely floating, but rather its exchange rate
remains fixed, the Dutch disease phenomenon can occur. In this case, the increased availability of aid
money expands domestic demand, which again can lead to inflation. Aid flows spent on domestic
goods would push up the price of other resources that are in limited supply domestically - such as
skilled workers- making industries (mainly the export sector) that face international competition and
depend on that resource more uncompetitive, and almost inevitably they close.
The IMF has stated that developing countries that rely on foreign capital are more prone to their
currencies strengthening. Accordingly, aid inflows would strengthen the local currency and hurt
manufacturing exports, which in turn reduces long-run growth. IMF economists have argued that
the contribution of aid flows to a country's rising exchange rate was one reason why aid has failed
to improve growth, and that aid may very well have contributed to poor productivity in poor
economies by depressing exports.
In other work, their research finds strong evidence consistent with aid undermining the
competitiveness of the labour-intensive or exporting sectors (for example, agriculture such as coffee
farms). In particular, in countries that receive more aid, export sectors grow more slowly relative to
capital-intensive and non-exportable sectors.
Aid inflows have adverse effects on overall competitiveness, wages, export sector employment
(usually in the form of a decline in the share of those in the manufacturing sector) and ultimately
growth. Given the fact that manufacturing exports are an essential vehicle for poor countries to start
growing (and achieving sustained growth), any adverse effects on exports should prima facie be a cause
for concern.
Moreover, because the traded goods sector can be the main source of productivity improvements
and positive spillovers associated with learning by doing that filter through to the rest of the
economy, the adverse impact of aid on its competitiveness retards not just the export sector, but
also the growth of the entire economy.
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In the most odd turn of events, the fact that aid reduces competitiveness, and thus the traded sector's
ability to generate foreign-exchange earnings, makes countries even more dependent on future aid,
leaving them exposed to all the adverse consequences of aid-dependency. What is more, policymakers
know that private to-private flows like remittances do not seem to create these adverse aid-induced
(Dutch disease) effects, but they largely choose to ignore these private capital sources.
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Resource Module
Turn – Dutch Disease – Increasing resource production causes Dutch Disease –
drives up prices for domestic goods and services, wrecking the economy
Holland, Energy Trends Insider, 12
[Andrew, 6-7-12, Energy Trends Insider, “Will Dutch Disease Follow-on the American Energy Boom?,”
http://www.energytrendsinsider.com/2012/06/07/will-dutch-disease-follow-on-the-american-energyboom/, accessed 7-12-13, MSG]
An ongoing discussion among some of us analysts at Consumer Energy Report has been about whether
having natural resources like oil or coal is actually beneficial to a country (see Are Countries With
Vast Oil Resources Blessed or Cursed?, Oil Dependence — Tom Friedman’s False Narrative, and Oil —
Easy to Produce, But Not Easy to Buy).
The argument which I’ve made is that a boom in natural resources production can cover up some
short-sighted economic policies; in effect, the earnings from producing oil mean that countries do
not have to invest in their education or produce their own manufactured goods. The other side of the
argument is that it can only be a good thing for new resources to be found.
Leaving aside the question of whether natural resource wealth undermines institutions or causes
corruption (and there is good evidence of a resource curse among developing countries) there is one
thing that increased production of oil does, once it gets to be a big enough sector of the economy: it
pushes up the value of that country’s currency.
All else equal (as economists always have to say), new production of natural resources strengthens
the domestic currency. That’s because those resources are either exported or are used to replace
imports.
Dutch Disease Phenomenon
Now – I should mention that I like a strong dollar, personally: it means I can afford to travel abroad
more, and buy more when I get there. It also means that French wine (for example) becomes cheaper
relative to Californian wine. I like French wine, and would welcome being able to buy more. However,
that shows the problem with having a strong currency — it undermines domestic manufacturing
and production (of Californian wine, in this example) by driving up prices of American-made goods
and services.
This phenomenon is called “Dutch Disease.” Coined by The Economist in 1977 to describe how
finding natural gas in the North Sea in 1959 affected the Netherlands’ economy over the ensuing decades.
The symptoms of the ‘disease’ are when commodity exports push up the value of a nation’s
currency, making other parts of the economy less competitive. This leads to a current-account
deficit, which makes the economy even more dependent upon the commodity. The disease is
especially pernicious for commodities like oil, coal, and natural gas because these industries are
very capital-intensive, and actually do not generate that many jobs.
There are two major industrialized countries that have undergone commodities booms over the
past decade: Canada and Australia. They are both showing signs of suffering from Dutch Disease,
with the Canadian dollar increasing in value vs. the American dollar (Canada’s #1 trading partner by far)
by over 50% in the last ten years, and the Australian dollar increased in value compared to world currency
rates by almost 70% in the past decade.
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Links
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Foreign Aid Links
The influx of foreign investment in a country negatively impacts the exports sector
and destroys competitiveness – empirically proven by the Europe
Alford, former New York Fed economist, 13
(Richard, financial strategist, 5/31/13, Naked Capitalism “The 'Dutch Disease' and Once and Future
Economic Crises in the US”, http://www.nakedcapitalism.com/2013/05/richard-alford-the-dutch-diseaseand-once-and-future-economic-crises-in-the-us.html, accessed 7/13/13, JZ)
The euro crisis has both a political and a financial dimension. And the financial dimension has at least
three components: a sovereign debt crisis and a banking crisis, as well as divergences in competitiveness.
He went on to say:
The boost derived from Eurobonds may not be sufficient to ensure recovery; additional fiscal
and/or monetary stimulus may be needed. But having such a problem would be a luxury. More
troubling, Eurobonds would not eliminate divergences in competitiveness. Individual countries
would still need to undertake structural reforms….
Hans-Werner Sinn put the loss of competitiveness front and center:
The ongoing financial crisis is merely a symptom of the monetary union's underlying malady: its
southern members' loss of competitiveness.
The euro gave these countries access to cheap credit, which was used to finance wage increases that were
not underpinned by productivity gains…
Soros says countries that fail to implement the necessary reforms after the introduction of Eurobonds
would become permanent pockets of poverty and dependency, much like Italy's Mezzogiorno region
today… (they) will permanently suffer from the so-called 'Dutch Disease,' with chronic unemployment
and underperformance….
The two also disagreed on the likely adjustment paths that would be followed under various possible
permutations of countries abandoning or being forced to abandon the Euro. However, they both agreed
that the north-south divergence in competiveness will have to be narrowed if Euroland is to be
stable and meet the goals that were expected of it when the Euro was introduced.
Sinn mentioned the Dutch Disease, linking the increased capital flows to the periphery to the
erosion of the competitiveness of the periphery. He is not alone in explicitly linking the increased
capital inflows and the loss of competitiveness. A recent VoxEU post, 'Did the Euro Kill Governance in
the Periphery?[2]' by Jesús Fernández-Villaverde, Luis Garicano, and Tano Santos stressed the decline in
efforts to promote competitiveness by countries in the periphery once they adopted the Euro:
By the end of the 1990s, under the incentive of Eurozone entry, most peripheral European countries
were busy undertaking structural reforms and putting their fiscal houses in order. …the arrival of
the euro, and the subsequent interest-rate convergence, loosened a tide of cheap money that reversed
the incentives for further reforms. As a result, by the end of the euro's first decade, the institutions
and governance in the Eurozone periphery were in worse shape than they were at the start of the
decade.
This conclusion is supported by evidence presented in the research paper, which is abstracted in the
VoxEU blog posting. The paper traces the history of and outlines a framework that can explain the
mechanisms by which the introduction of the Euro contributed to the pre-crisis boom and the weakening
of private and public governance across four countries in the periphery. Like Sinn, Fernández-Villaverde,
Garicano, and Santos explicitly linked the Dutch disease to the crisis in Europe: 'Also, the 'Dutch
Disease' suffered most clearly by Ireland and Spain…,' the authors also cite research that identifies
links between economic and financial reforms on the one hand and economic conditions on the other:
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…It has been long observed in the political economy literature that for growth enhancing reforms to
take place, things must get 'sufficiently bad'…(the authors cite studies by Sachs and Warner, and
Rodrik) . And, as the development literature has emphasized, foreign aid loosens these constraints by
allowing those interest groups whose constraints are loosened to oppose reforms for longer…also
finds that the mechanism operates when debt grows, rather than aid.
The authors also identify an additional mechanism: the reduced ability and the willingness of economic
agents to extract accurate information in a boom or bubble:
When all banks are delivering great profits, all managers look competent; when all countries are
delivering the public goods demanded by voters, all governments look efficient (this mechanism
applies both to real estate bubbles as in Ireland and Spain, and to sovereign debt bubbles as in Portugal
and Greece).
The posts and research cited above do not establish that the crisis in the Euroland periphery can be
completely explained as a case of the Dutch Disease. In fact, they reinforce the view that the Dutch
Disease may be less of a disease (with a well-defined course and outcome) and more of a syndrome (a set
of symptoms with similar courses and outcomes). Nonetheless, it does appear to be a useful perspective
from which crises in developed countries can be examined. The analyses suggest cases of the Dutch
Disease/Syndrome share a number of factors in common:
1. Significant capital inflows
2. Low interest rates
3. A deterioration of the trade balance and resource shift to the non-tradable sectors
4. Weakening of private and public governance
Over-dependence on foreign aid supports corrupt governments that grow to depend
even more on aid – makes economic recovery impossible and decline inevitable
bin Talal, United Nations Secretary-General's Advisory Board on Water and
Sanitation chairman, 9
(Prince El Hassan, former prince of Jordan, 9/10/09, Korea Times, “How to Modernize Middle East's
Economies”, http://www.koreatimes.co.kr/www/news/opinon/2009/09/137_51595.html, accessed
7/13/13, JZ)
AMMAN - Rather than speak of the Middle East or the Arab world, I increasingly prefer to use the term
WANA, meaning West Asia-North Africa.
But, whatever we choose to call it, the danger is that the global economic crisis is providing an almost
perfect alibi for governments and others in the region to continue with "business as usual," when
what is needed is a loud wake-up call.
The global economic crisis has merely helped to mask chronic structural imbalances within the
region. Over-dependence on aid and oil revenues characterizes almost all the economies of WANA.
Indeed, it is no exaggeration to say that they represent a form of life-support system. The problem of how
to wean these countries off this addiction seems to be insurmountable.
For the "Dutch disease" and a rentier spirit prevail in WANA, and have affected oil-producing and
non-oil-producing countries, ranging from migrant workers' remittances and financial investment
flows from the oil countries (mainly into real estate) to stock-exchange bubbles and foreign aid.
A side effect of this has been the widening of income gaps, both within and between the WANA
countries.
Political scientists tell us that rentier economies, or economies that depend on oil and foreign aid,
stimulate greed and grievances.
Indeed, oil rents eventually weaken state institutions, and this hollowing out of the state often gives
rise to growing discontent.
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In a non-oil economy, labor is the main engine of wealth. But in a rentier economy, huge revenues from
oil or external financial transfers actually create a disincentive to work. Wealth and work are delinked, and this applies to most industrial and agricultural activities.
Social and political mobility becomes extremely limited, and societies turn from production to
consumption. This helps to explain the high level of unemployment in the Arab world.
According to World Bank figures, the Middle East North Africa (MENA) region suffered a 25 percent
fall in per capita incomes during the last 25 years of the 20th century, when oil prices were low. In this
decade, thanks to record-high oil prices, GDP growth rates soared.
A recent study by India's Strategic Foresight Group entitled "The Cost of Conflict in the Middle East"
suggested that the past 20 years of conflict have cost WANA countries some $12 trillion.
Rent-seeking tends to lead to policy failure in the form of intense political competition aimed at gaining
short-term access to revenues and benefits, as opposed to political competition over what policies might
be in the long-term public interest.
The politics of greed and grievance replace more far-sighted policymaking.
Foreign aid fails – creates economic dependency and fosters non-democratic regimes
Keenan, University of Illinois associate professor of law, 9
(Patrick J., 2009, “CURSE OR CURE? CHINA, AFRICA, AND THE EFFECTS OF
UNCONDITIONED WEALTH”, Berkeley Journal of International Law, vol. 84, Lexis, accessed
7/13/13, JZ)
III.
Conventional Accounts of State Behavior and Unconditioned Wealth
Are states sensitive to the source of their wealth? Does it matter whether a state receives the bulk of its
income from taxes on goods produced domestically, or from oil revenues, or in the form of aid from other
countries? It is true, of course, that most states in the developing world derive revenue from these and
many other sources. And it is likely a fool's errand to attempt to specify any single factor as the sole or
primary reason that any government behaves at it does. Despite these limitations, there is evidence that
the source of a regime's wealth might well affect human rights practices in the country. These issues
have taken on increasing importance with China's recent investments in Africa because they are
largely devoid of the conditions that historically have accompanied foreign investment or assistance. In
this Part, I start by assessing [*105] the effect of resource wealth on regime behavior. There is a welldeveloped economic literature suggesting that rapid influxes of wealth from natural resources can have a
profound effect on the domestic economy of a state. Moreover, according to a political economic
approach, there is increasing evidence that resource wealth can contribute to a weakening of
democratic institutions, an increase in official corruption, and a deterioration in human rights
practices. I then consider the effects of foreign aid, which largely parallel those of resource wealth. In the
end, this survey of the literature is important to my argument because it helps frame the likely effects of
China's investments in Africa.
A. The Macroeconomic Approach: The "Dutch Disease"
Economists have long noted that rapid infusions of wealth from foreign sources such as remittances
from colonies or earnings from exports can disrupt the domestic economy. n100 Known variously as
"the Dutch disease" n101 or the resource curse, the basic economic analysis looks at the effect that a rapid
expansion in the export of natural resources has on a domestic economy. A natural resources boom can
affect a domestic economy through two closely-linked causal pathways. First, in a typical domestic
economy, one reason that goods manufactured for export are valuable is that they generate foreign
exchange, which can be used to import goods from other countries. But if, for example, natural gas is
discovered and begins to generate significant amounts of foreign exchange, there is no longer a need to
manufacture other goods for export because the domestic demand for foreign currency has already
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been satisfied. n102 One consequence of this is to make products produced solely for the domestic
market relatively more expensive and to suppress the profitability of goods (other than natural
resources) produced for export. n103 Put slightly differently, it is the effect of increased earnings from the
sale of natural resources on demand that matters. n104 Assume that the demand for some goods [*106]
can be satisfied by importing them, but that other goods can only be produced domestically. In this case,
the relative price of domestically-produced goods will rise, and draw capital and labor "into the
non-traded goods sector and away from tradeables." n105 Thus, in a developed economy, the result of
a natural resources boom on a domestic economy can be to raise the price of local goods and services and
reduce the value of non-resource exports. n106
In a developing economy, the results can be similar, but, owing to structural differences between
developed and developing economies, the causal pathways are somewhat different. A resource boom has
at least two important effects. First, because of changes in the relative rates of return in different
economic sectors, a boom can cause resources to shift from one sector of the economy to another "the resource movement effect." n107 The second effect is the "spending effect," which occurs
when increasing incomes lead to greater spending on some goods and services (primarily those
associated with the booming industry), thereby increasing their price and causing the real exchange
rate to rise. n108 Because the relative size of each effect is determined by other features of the economy,
it is here that developing economies can differ from developed economies. The most important factor is
whether the sector responsible for the boom - typically the exploitation of a resource such as oil or gas depends mostly on resources that can be drawn from other sectors of the economy. n109 If, as is often the
case, "the oil sector in a developing country is an enclave with respect to the rest of the economy
(since it uses mainly imported materials and labor)," there is unlikely to be a significant shift of
resources within the domestic economy. n110 On the other hand, the spending effect can be significant
as goods with increased demand drive up the prices of one category of goods more than another. n111
B. The Political Economy Approach: The Resource Curse
The Dutch disease literature seeks to explain the relationship between resource endowments and
economic outcomes. This macroeconomic model, though useful for explaining a number of cases, is
limited because it does not account for those states with substantial natural resources that are growing. Put
another way, why do some states with natural resources show remarkable [*107] growth while others
seem to suffer despite their riches? n112 It is true, of course, that economic models are not laws of nature;
that a model explains one situation does not mean it will explain every apparently similar situation. Even
so, this model does not fully account for the robust empirical evidence showing that a reliance on natural
resource exports, particularly oil, is associated with lower-quality governance, greater corruption, and a
higher likelihood of civil war. First, as to governance, the strongest association is between a greater
incidence of authoritarian governance and oil wealth. Even when controlling for a range of other
factors that might influence governance, "oil does hurt democracy." n113 What is more, "oil does greater
damage to democracy in poor states than in rich ones," even if exports are relatively small. n114 Next, as
to corruption, there is evidence that natural resource wealth creates strong incentives for economic
actors to bribe those who control access to the resources. n115 Finally, the evidence of the
association between resource wealth and civil conflict is compelling and appears robust across a
number of contexts. n116
[*108]
C. Foreign Aid: Different Source, Similar Effects
In addition to revenue from the sale of natural resources, an important source of revenue for many
poor countries is foreign assistance. Wealthy countries provide vast amounts of money per year to poor
countries in the form of grants and loans. In the past, much of this assistance was provided as loans that
were, in theory, required to be repaid. More recently, foreign aid has come in the form of grants, with no
obligation of repayment. The conventional approaches to aid had two broad justifications. First, aid is
viewed as an instrument of foreign policy, designed to influence recipient states to behave in ways that
benefit the donor state. n117 On this account, aid can be either a carrot or a stick. Poor states know that if
they wish to receive (or continue to receive) aid, they must behave in particular ways. Or, if states fail to
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behave, the donor state might withdraw aid (or provide it to the recipient's strategic rival). The second
conventional account of aid is that it is provided because of some moral obligation - wealthy states
provide aid because they can and because poor states need it to reduce the suffering or increase the social
welfare of their people. n118
The two most common measures of the effectiveness of aid are whether the aid contributed to
economic growth or enhanced democracy. n119 Most aid flows from wealthy democracies like the
U.S., Europe, and Japan to poor non-democratic states. For donors, whether this aid was a wise use of
funds was thought to depend, at least in part, on whether recipient states became more democratic
and more market-oriented. The other most common test of the effectiveness of aid is whether the
recipient state experienced economic growth. n120 The evidence suggests that aid, at least as
conventionally defined and delivered, has been largely ineffective on both scores. n121
[*109] There is little consensus about why aid has been so ineffective at achieving donors' stated goals.
Consider three hypotheses. One theory is that aid creates a type of moral hazard for recipients. n122
There are many versions of this argument, but most suggest that recipients of aid use it not to open
their economies or invest in their own people, but to entrench their own power through legitimate or
illegitimate means. n123 On this theory, aid is ineffective because donors are unable to control the
uses to which recipients put aid, which allows recipients with a desire to stay in power to do so. n124
Another element of this theory is that aid can undermine the recipient government's incentive to
pursue policies that might improve social welfare but might simultaneously create political risk for
incumbents. Aggressive tax collection and high tax rates are an example of such a policy. n125
A second explanation for the apparent ineffectiveness of aid is that aid too often comes with unhelpful
requirements for its use. This theory holds that aid amounts to a form of centralized planning that can
cause recipient states' bureaucracies to swell and can cause recipient economies to develop in ways
that are responsive to the ill-conceived ideas of donors rather than the expressed [*110] preferences of
local consumers or other legitimate market forces. n126 In contrast to the moral hazard theory, this
account suggests that the problem is that the policy preferences of donors are followed too closely,
thereby distorting the natural or appropriate development of the local economy.
Foreign aid fails – creates a culture of dependency and prevents long term economic
growth
Business Monitor Online, 11
(6/21/11, “Uganda: From Aid To Taxes – A Crucial Transition”, EBSCO, accessed 7/13/13, JZ)
The Problem With Aid
Studies evaluating the effectiveness of aid have resulted in heated debates and mixed conclusions.
While aid targeted at specific outcomes, such as vaccinations or food provision, is demonstrably
successful at achieving those short-term goals, the dispute largely centres on longer-term outcomes.
Aid's effectiveness in promoting economic growth, capable institutions, and social justice over the
course of many years is doubted by many, with even the most vocal advocates for aid accepting it has
its flaws.
One of the most common criticisms is the concept of aid dependence, that a steady stream of free
money creates a strong disincentive to develop domestic sources of revenue. IMF economists
Raghuram G. Rajan and Arvind Subramanian have described the process of dependency as follows:
'Even though aid resources are initially additional to the budget, eventually the country becomes
more lax on raising tax revenues, and more aid is necessary just to keep the country on even keel. If
that aid is not forthcoming, and if the country's tax raising mechanisms have atrophied, all the shortterm beneficial effects of aid may dissipate over the long run as it creates a culture of dependency'.
Aid may also create a sort of manmade resource curse. Since foreign aid is by definition denominated
in foreign currency, large inflows may skew recipient countries' balance of payments positions and
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by extension the currency to such an extent that manufactures and other exports are uncompetitive,
stymieing broad-based development. Large inflows into public coffers may also diminish taxpayers'
ability to hold authorities to account.
Aid hampers development – fosters dependence and creates the “resource curse”
Cape Times, 9
(news source, 4/12/09, “Western aid a debilitating addiction that African countries could do without”, pg.
9, Questia, accessed 7/13/13, JZ)
"What if, one by one, African countries each received a phone call telling them that in exactly five
years the aid taps would be shut off - permanently?" the young Zambian economist Dambisa Moyo
asks in her book Dead Aid.
Her bold answer to that excellent question is that African countries would finally prosper, freed at last
from what she regards as the stifling burden of foreign aid.
Many analysts have complained that aid has done no good to Africa.
Not so many have argued, as she does, that aid has itself been the single greatest cause of Africa's
failure to develop and grow and so should be scrapped altogether.
This of course runs entirely contrary to the fashionable (though one suspects, now faltering) view
(best articulated by the likes of Tony Blair in his Commission for Africa report and endorsed by the 2005
G8 Gleneagles summit) that what Africa needs instead is a doubling and perhaps even tripling of aid over
the next decade or so.
Moyo wholly disagrees, arguing that donor countries have already poured more than $1US trillion
of aid into Africa over the past 50 years, yet the continent is generally far worse off.
She likens foreign aid to the "resource curse"' of African countries rich in natural resources like
oil, yet mostly still wretched and poor.
And for many of the same reasons - that dollops of Western aid, like oil and mining revenues, have
mostly just increased the spoils of power for African elites to fight over, leaving very little of either to
trickle down to ordinary citizens.
Moyo directs much blame at Western donors and financial institutions like the World Bank and IMF
for stipulating conditions (sound economic policies, good governance etc) for their grants and loans, but
never enforcing them.
She also identifies more subtle economic reasons why aid is bad - it pushes up inflation and also the
exchange rates of recipient countries, making their exports less competitive, crowds out local
entrepreneurs and perhaps financiers, discourages local saving and therefore harms long-term
growth.
In short, the steady and seemingly endless flow of capital, mainly from the West, has turned many
African countries into aid-addicts, dependent on outside finance and therefore unable or unwilling to
find their own sources of finance to tackle their countries' problems.
Aid fails – fosters Dutch Disease
Moyo, Goldman Sachs economist, 9
(Dambisa, author of "Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa.",
Wall Street Journal- Africa News, 3/21/09 “Why Foreign Aid Is Hurting Africa”,
http://online.wsj.com/article/SB123758895999200083.html2, accessed 7/8/2013, QDKM)
A constant stream of "free" money is a perfect way to keep an inefficient or simply bad government
in power. As aid flows in, there is nothing more for the government to do -- it doesn't need to raise
taxes, and as long as it pays the army, it doesn't have to take account of its disgruntled citizens. No
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matter that its citizens are disenfranchised (as with no taxation there can be no representation). All the
government really needs to do is to court and cater to its foreign donors to stay in power.
Stuck in an aid world of no incentives, there is no reason for governments to seek other, better,
more transparent ways of raising development finance (such as accessing the bond market, despite
how hard that might be). The aid system encourages poor-country governments to pick up the phone
and ask the donor agencies for next capital infusion. It is no wonder that across Africa, over 70% of
the public purse comes from foreign aid.
In Ethiopia, where aid constitutes more than 90% of the government budget, a mere 2% of the country's
population has access to mobile phones. (The African country average is around 30%.) Might it not be
preferable for the government to earn money by selling its mobile phone license, thereby generating
much-needed development income and also providing its citizens with telephone service that could, in
turn, spur economic activity?
Look what has happened in Ghana, a country where after decades of military rule brought about by a
coup, a pro-market government has yielded encouraging developments. Farmers and fishermen now use
mobile phones to communicate with their agents and customers across the country to find out where
prices are most competitive. This translates into numerous opportunities for self-sustainability and income
generation -- which, with encouragement, could e easily replicated across the continent.
To advance a country's economic prospects, governments need efficient civil service. But civil service is
naturally prone to bureaucracy, and there is always the incipient danger of self-serving cronyism and the
desire to bind citizens in endless, time-consuming red tape. What aid does is to make that danger a grim
reality. This helps to explain why doing business across much of Africa is a nightmare. In Cameroon, it
takes a potential investor around 426 days to perform 15 procedures to gain a business license. What
entrepreneur wants to spend 119 days filling out forms to start a business in Angola? He's much more
likely to consider the U.S. (40 days and 19 procedures) or South Korea (17 days and 10 procedures).
Even what may appear as a benign intervention on the surface can have damning consequences. Say there
is a mosquito-net maker in small-town Africa. Say he employs 10 people who together manufacture 500
nets a week. Typically, these 10 employees support upward of 15 relatives each. A Western governmentinspired program generously supplies the affected region with 100,000 free mosquito nets. This promptly
puts the mosquito net manufacturer out of business, and now his 10 employees can no longer support
their 150 dependents. In a couple of years, most of the donated nets will be torn and useless, but now
there is no mosquito net maker to go to. They'll have to get more aid. And African governments once
again get to abdicate their responsibilities.
In a similar vein has been the approach to food aid, which historically has done little to support African
farmers. Under the auspices of the U.S. Food for Peace program, each year millions of dollars are used to
buy American-grown food that has to then be shipped across oceans. One wonders how a system of
flooding foreign markets with American food, which puts local farmers out of business, actually helps
better Africa. A better strategy would be to use aid money to buy food from farmers within the country,
and then distribute that food to the local citizens in need.
Then there is the issue of "Dutch disease," a term that describes how large inflows of money can
kill off a country's export sector, by driving up home prices and thus making their goods too
expensive for export. Aid has the same effect. Large dollar-denominated aid windfalls that envelop
fragile developing economies cause the domestic currency to strengthen against foreign currencies.
This is catastrophic for jobs in the poor country where people's livelihoods depend on being
relatively competitive in the global market.
To fight aid-induced inflation, countries have to issue bonds to soak up the subsequent glut of
money swamping the economy. In 2005, for example, Uganda was forced to issue such bonds to mop up
excess liquidity to the tune of $700 million. The interest payments alone on this were a staggering $110
million, to be paid annually.
The stigma associated with countries relying on aid should also not be underestimated or ignored.
It is the rare investor that wants to risk money in a country that is unable to stand on its own feet
and manage its own affairs in a sustainable way.
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Oil Production Links
Increasing oil production causes Dutch Disease – hurts manufacturing and jobs
LeVine, E&E reporter, 12
[Steve, 6-7-12, E&E, “A cautionary tale for U.S. energy policy unfolds in the Land Down Under,”
http://www.eenews.net/stories/1059965497, accessed 7-12-13, MSG]
U.S. economists and energy analysts, taking stock of growing production in shale oil and shale gas
fields, have begun to forecast a broad-based American economic revival, including hundreds of
thousands of new jobs. But Australia illustrates that such booms do not necessarily produce broadbased job growth, and that they can prove debilitating in unexpected ways to other important
industries.
"The challenge for the government has been to even out the non-commodities sectors so they can
take advantage of the resource boom," said Divya Reddy, a coal analyst with the Eurasia Group.
The Australian boom roughly coincides with the commodities "super-cycle," a period since 2002 in
which a Chinese-led surge of demand for raw materials, coinciding with relatively tight global
supplies, has triggered a sharp rise in prices for metals and hydrocarbons. Australia has been an
outsized beneficiary of the super-cycle, with its comparatively small population, stable investment
environment, prodigious quantities of key natural resources and capacity for reliably delivering
materials to China.
In the coming couple of decades, coal and iron ore will be joined by LNG as a principal export
earner for Australia. The country currently produces 20 million tons of LNG a year. By the end of the
decade, Australia is on track to become the world's biggest producer of LNG, with seven projects
worth $169 billion under way that would raise that to 80 million tons a year. That would eclipse Qatar's
77 million tons of yearly export capacity. Much of this Australian LNG is already sold in decades-long
contracts with China and Japan.
"The big story is the type of player that Australia is becoming on the LNG side," said Josh Meltzer, a
former Australian diplomat and now a senior fellow at the Brookings Institution. "It is going to be fairly
ground-breaking."
'Very real risks that we might not make the most of this boom'
Some analysts are urging the country to more deeply embrace a commodities-based economy. Last year,
Australia and New Zealand Banking Group issued a much-discussed 31-page report that conceded the
trade-offs of massive investment in raw materials production, such as a crowding out of investment in
manufacturing. But it concluded that, on balance, natural resources present a greater upside for the
economy.
"The shift in the source of global growth to the developing world means that many of the fastest growing
sectors are now in basic materials, energy and commodities," ANZ said. "Natural resource-related sectors
can form the cornerstone for Australia's growth and productivity gains in the coming years."
Yet some analysts worry about allowing manufacturing to wither. Cyclical commodities can
plummet in price as well as go up, as the global market is currently demonstrating. In addition, coal
competition from the United States, Mongolia, Russia, Colombia and Indonesia is eroding
Australia's dominant place in the regional market. U.S. and Mozambique gas producers have plans
to ship large volumes of LNG to Asia.
"Whilst the Australian coal industry is in great shape, there are very real risks that we might not
make the most of this boom, as we head toward a high-cost environment and our competitors move
aggressively to eat into our market share," said Nikki Williams, CEO of the Australian Coal
Association.
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Despite the surge of Australian mining, the absolute number of jobs has not caught up with
manufacturing, which is the country's primary employer. According to the Australian Bureau of
Statistics, manufacturing has lost about the same number of jobs as mining has added over the past
four years -- 97,200 and 103,000, respectively. Even so, manufacturing companies still employ about
950,000 people, compared with about 240,000 in mining.
Australia is an "economic powerhouse of commodities," said Neil Bristow, managing director of
H&W Worldwide Consulting. But the result is "very much a mixed prosperity," he said. "Parts of the
economy are doing very, very well. But the amount of jobs being generated in the mining sector is
really not that many compared with the lost tourism service jobs and manufacturing jobs."
Mining and gas industry players say they have more potential projects than the capital, manpower
and equipment to exploit them, and plan to continue the massive injection of investment into raw
materials plays. Yet given the distribution of jobs, the government may have to step in if more
economic balance is sought. "Bull markets don't last forever and commodity bull markets are
especially ephemeral," Société Générale's Grice wrote.
Increasing oil production causes Dutch Disease – hurts other domestic
entrepreneurs
Glaeser, Harvard Economics professor, 12
[Edward, 7-11-12, Bloomberg, “What the U.S. Can Learn From Australia’s Coal Mines,”
http://www.bloomberg.com/news/2012-07-11/what-the-u-s-can-learn-from-australia-s-coal-mines.html,
accessed 7-12-13, MSG]
In Western Australia, which produced more than A$62.8 billion worth of iron ore in 2011, iron-ore
companies employed only 33,345 people. Iron-ore producers, as a whole, spent less than one-tenth of
their total earnings on wages and salaries; 42 percent of those earnings became pretax profits.
Mining does little for Australian employment because mining is profoundly capital-intensive. Ore is
pried from the Earth by computer-controlled blasts. One insightful article reminds us that mining is not
men “wielding pickaxes, but sitting in prefab offices with keyboards, watching on video monitors.”
Even those 1.5-mile-long trains will soon be driverless.
The Australians themselves seem to think their economy is far more mining-intensive than it is in
reality. One recent survey found that, on average, Australians believe the mining sector “employs nine
times more workers than it actually does” and “accounts for three times as much economic activity as it
actually does.” Australians may prefer to see themselves as a nation of rugged extractors, rather than as a
conventional service-based economy, but overestimating the importance of natural resources can lead to
faulty public policy.
Dangerous Dynamic
Australia is lucky to have its mining revenue, but that cash has a cost. For decades, economists have
fretted about the Dutch disease, which can occur when natural-resource exports push up exchange
rates. Australia has experienced a steady increase in the value of its dollar, and a high exchange
rate makes it more difficult to export other products. The really dangerous dynamic occurs when
high exchange rates crowd out more innovative industries that employ more typical Australian
workers.
A recent paper I co-wrote with William Kerr and Sari Pekkala Kerr examined the long-run impact of
mining across the U.S. Fifty years ago, the economist Benjamin Chinitz noted that New York
appeared even then to be more resilient than Pittsburgh. He argued that New York’s garment
industry, with its small setup costs, had engendered a culture of entrepreneurship that spilled over
into new industries. Pittsburgh, because of its coal mines, had the huge U.S. Steel Corp. (X), which
trained company men with neither the ability nor the inclination to start some new venture. A body
of healthy literature now documents the connection between economic success and measures of
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local entrepreneurship, such as the share of employment in startups and an abundance of smaller
companies.
Our new paper documents Chinitz’s insight that mineral wealth historically led to big companies, not
entrepreneurial clusters. In Australia, iron ore and coal are mined by giant corporations such as
Rio Tinto Plc and BHP Billiton Ltd., and giant enterprises typically work best with other big
companies. Across U.S. metropolitan areas, we found that historical mining cities had fewer small
companies and fewer startups, even today in sectors unrelated to mining or manufacturing, and even in
the Sunbelt. These mining cities were also experiencing less new economic activity.
Low Taxes
Australia’s economic future depends on using its mineral wealth wisely, following the example of Iowa
farmers who once used their corn profits to fund high schools. Yet Kevin Rudd, a former prime minister
of Australia, was ousted in a backdoor political coup in 2010 partially because of his support for an extra
mining tax. I’m against almost all industry-specific taxes, but the share of miners’ “resource profits”
returned to the Australian government in the form of taxes and royalties fell from about 40 percent in
2001 to less than 20 percent seven years later.
It is a fiction that U.S. economic woes could be solved if only the nation adopted a “drill, baby,
drill” attitude toward natural resources. Less than 0.6 percent of American jobs are in naturalresource extraction. Even a vast increase in drilling employment would have a trivial impact on
U.S. jobs. Oil prices are set in the world market, so American production can do little to radically
decrease the global price of petroleum.
The wealth that comes out of the ground is a short-term windfall, not a long-term source of
economic growth. The U.S. and Australia should both recognize that their futures depend on
training smart, innovative entrepreneurs and reducing the barriers that limit their success.
Oil production causes Dutch disease – takes jobs away from other industries and
renders other industries noncompetitive
Garber, US Agency for International Development Office of Economic Growth
economist, 4
[David S., July 2004, “Oil, Dutch Disease, and Development: The Case of Chad,”
http://global.wisc.edu/skj/fellows/reports/2004-travel-garber.pdf, accessed 7-12-13, MSG]
It would seem that the discovery of a natural resource that is highly valuable on the international ¶ market
would cause great joy for its owner. Despite the prospects for investment opportunities that ¶
petroleum extraction may yield, evidence has been rather mixed regarding the actual impact the
industry ¶ has had on the nation-owner. In particular most cases of oil development in poorer nations
have produced ¶ outcomes of increased disparity of wealth often resulting in political instability
(Nigeria, Angola, and ¶ Bolivia provide clear examples). Although social scientists have correctly
identified political factors as ¶ an important mechanism for converting oil wealth into unfavorable
outcomes, the economics literature ¶ has identified further the usually unintentional negative
economic consequences of an oil boom on the ¶ rest of the economy. The term used for the
phenomenon is Dutch Disease.
The name Dutch Disease is derived from evidence gathered from the experience of the ¶ Netherlands
in its discovery and development of North Sea oil resources. The outcome of the oil boom ¶ was to
induce a decline in non-boom export industries with the result in many cases of total ¶
disappearance.
The reason for such an outcome is two-fold. The first component of the Dutch Disease is a ¶ Resource
Movement Effect that in the oil industry occurs primarily during the construction phase of a ¶
project. The oil sector induces increased demand for the factors on which it depends. These factors ¶
become too expensive for use in non-boom industries. The construction phase of an oil project is
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highly ¶ labor-intensive. We often witness a migration of labor for pre-existing industries towards
the oil industry. ¶ Any other projects relating to the oil industry also become more costly, often to a
prohibitive level. We ¶ can imagine a crisis situation when, in a poorer nation, the product of rising
cost is food.
The second, too often overlooked, component of Dutch Disease is also the more important of the ¶ two
with regards its long-term implications. When foreign revenues start flowing into the country, the ¶
investments that are most often undertaken depend on non-tradable products. The most obvious of
these ¶ is construction. One measurement of a country’s real exchange rate is the ratio of demand for
nontradable versus tradable goods. Increased demand for non-tradable goods is equivalent to an
appreciation ¶ of a nation’s exchange rate. An appreciation of the exchange rate, along with the
increase in factor prices ¶ mentioned above, renders non-boom export products less competitive on
the world market. Thus, as in ¶ the case of the Netherlands, we often see a restructuring of the
economy away from pre-boom exports. ¶ This phenomenon has been called the Spending Effect. In
poorer nations the pre-boom industries are very ¶ often primary agricultural products whose
owners are already living on the margins of survival.
Oil production causes Dutch Disease – causes the spending and resource movement
effects and hurts the country economically and politically
Ebrahimzadeh, IMF’s Middle East and Central Asia Department assistant, 12
[Christine, 3-28-13, International Monetary Fund Finance and Development, “Dutch Disease: Wealth
Managed Unwisely,” http://www.imf.org/external/pubs/ft/fandd/basics/dutch.htm#author, accessed 7-1213, MSG]
How does this happen? Let’s take the example of a country that discovers oil. A jump in the
country’s oil exports initially raises incomes, as more foreign currency flows in. If the increased foreign
exchange were spent entirely on imports, there would be no direct impact on the country’s money supply
or demand for domestically produced goods. But suppose the foreign currency is converted into local
currency and spent on domestic nontraded goods. What happens next depends on whether the
country’s (nominal) exchange rate—that is, the price of the domestic currency in terms of a key foreign
currency—is fixed by the central bank or is flexible.
If the exchange rate is fixed, the conversion of the foreign currency into local currency would
increase the country’s money supply, and pressure from domestic demand would push up domestic
prices. This would amount to an appreciation of the “real” exchange rate—that is, a unit of foreign
currency would buy fewer goods and services in the domestic economy than it did before. If the
exchange rate is flexible, the increased supply of foreign currency would drive up the value of the
domestic currency, which also implies an appreciation in the real exchange rate—in this case
through a rise in the nominal exchange rate rather than a rise in domestic prices. In both cases, real
exchange rate appreciation weakens the competitiveness of the country’s exports, and causes its
traditional export sector to shrink. This entire process is called the spending effect.
At the same time, resources (capital and labor) would shift to the production of domestic goods that
are not traded internationally—to meet the increase in domestic demand—and to the booming oil
sector. Both of these transfers shrink production in the now lagging traditional export sector. This
is known as the resource movement effect.
These effects played out in the oil-rich nations in the 1970s, when oil prices soared and oil exports rose at
the expense of the agricultural and manufacturing sectors. Similarly, higher coffee prices in the late 1970s
(after frost destroyed Brazil’s coffee crop) triggered a boom in the coffee sector in producers like
Colombia at the expense of manufacturing (the lagging tradable sector), as resources were reallocated to
the agricultural (nontradable) sector.
How much of a problem?
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Is the damper on the lagging internationally traded goods sector really a problem? Some economists say
no, if the higher inflows are expected to be permanent. In these cases, they say, Dutch disease may simply
represent the economy’s adaptation to its newfound wealth, making the term “disease” a misnomer. The
shift in production from the tradable to the nontradable sector is simply a self-correcting mechanism, a
way for the economy to adapt to an increase in domestic demand.
But other economists argue that even a permanent change is worrisome. When capital and labor
shift from one sector to another, industries are forced to shut down and workers have to find new
jobs, and the transition—no matter how brief—is painful, both economically and politically.
Economists also worry that a shift in resources away from the manufacturing sector, which generates
“learning by doing,” might jeopardize a country’s long-term growth potential by choking off an
important source of human capital development. The bottom line is that, regardless of whether these
changes are seen as a problem, policymakers must help the economy cope with their ramifications.
Increasing oil production is bad – causes Dutch disease, distorting currency and
undermining other industries
The Economist, 10
[9-9-10, The Economist, “It's only natural,” http://www.economist.com/node/16964094, accessed 7-1213, MSG]
Even so, relying on raw materials carries a series of risks. One is volatility: their prices are more
variable than those of manufactures. Second, many economists worry about “Dutch disease”, a term
coined by this newspaper in 1977 to describe the impact of a North Sea gas bonanza on the economy of
the Netherlands. This malady involves commodity exports driving up the value of the currency,
making other parts of the economy less competitive, leading to a current-account deficit and even
greater dependence on commodities. This matters all the more because mining and hydrocarbons
are capital-intensive businesses, generating relatively few jobs.
The commodity boom, together with capital inflows attracted by better economic prospects, has
already pushed up the value of some of the region's currencies. For example, São Paulo seems
extraordinarily expensive to any visitor. The strength of the Brazilian currency, the real, worries officials
and industrialists.
A third concern is that many non-agricultural commodities are not renewable (although high prices
encourage new discoveries), so governments should invest the tax revenues they generate in infrastructure
and training to diversify the economy. Producing commodities may also involve local environmental
damage. In parts of Latin America mines and oilfields are in areas inhabited by people of
indigenous descent and have caused cultural clashes.
A fourth problem is the potentially corrosive effect of commodity production on political
institutions. Many commodities incorporate rents (ie, excess profits derived from the fact that supply
is usually limited in the short term). It is in the state's interest to capture those rents, but corruption
often follows when it does. Mines and oil- and gasfields often involve high sunk costs and low
variable costs, making them a tempting target for expropriation. Venezuela provides the clearest
evidence of these ills.
Canada proves – rapid domestic oil production guts countries from the inside out
which playing into the oil countries hands
Greenpeace press release, 12
[1-5-12, States News Service, “CANADA: CLIMATE CRIMINAL”, Lexis, accessed 7-12-13, JB]
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At the dawn of the 21st century a new political regime has transformed Canada from global hero once standing up for peace, people, and nature - to global criminal, plunging into war, eroding civil
rights, and destroying environments.
What happened to Canada? Oil. And not just any oil, but the world's dirtiest, most destructive oil.
Canada's betrayal at the Durban climate talks - abandoning its Kyoto Accord commitments - is the direct
effect of becoming a petro-state.
By the late 20th century, oil companies knew that the world's conventional oil fields were in decline
and oil production would soon peak, which it did in 2005. These companies, including sovereign oil
powers such as PetroChina, turned their attention to low-grade hydrocarbon deposits in shale gas, deep
offshore fields, and Canada's Alberta tar sands. Simultaneously, inside Canada, oil companies began
promoting the political career of the son of an Alberta oil executive, the conservative ideologue
Stephen Harper.
Shell Oil opened operations in the tar sands in 2003. In 2004, the same year Canada signed the
Kyoto Accord, committing to reduce carbon emissions, oil companies began to form "think tanks" and
astroturf groups in Canada to establish the oil agenda and promote Harper as Conservative Party leader.
Two years later, in 2006, Harper's Conservatives formed a minority government with 36% of the
popular vote and launched Canada's petro-state era, slashing environmental regulations, joining
US Middle East wars, and launching a tar sands campaign, one of the most ecologically destructive
industrial projects in human history.
In Durban, in December 2011, after mocking climate science and common decency, Canada's
Environment Minister, Peter Kent announced that Canada would abandon the Kyoto deal,
abrogating a legally binding international agreement, which Canada had signed seven years earlier.
The Canadian government has become the policy arm and public relations voice of the
international oil industry, discarding its reputation as an ethical country. Millions of Canadians
have expressed outrage at the government that abandoned them and shamed Canada on the world
stage. These voices are rarely heard in Canada's corporate media. Meanwhile, Canadians witness
an erosion of free press and civil rights within their own nation. They should not be surprised.
Life as an oil resource colony
"Oil and democracy do not generally mix," explains Terry Karl in The Paradox of Plenty: Oil Booms
and Petro-States. Oil is a "resource curse" for local populations, as experienced by Nigeria, Indonesia,
Venezuela, Iran, Algeria, Saudi Arabia, and other nations. Oil rich nations attract oil industry patrons,
who tend to support dictators. Petro-states often lose local economic sovereignty, suffer human rights
atrocities, and see their environments devastated.
In the 1970s, the UK and Dutch economies experienced the oil curse as the North Sea oil and gas
boom gave the illusion of prosperity while eroding sovereign economic capacity. Britain's petro-state
leader Margaret Thatcher used oil revenues to wage war, create banking empires, and subsidize elite
society, while plundering the environment and leaving common citizens dispossessed of their own
national heritage.
In 1977 The Economist magazine coined the term "Dutch disease" to describe the social and
manufacturing decline caused by extreme resource exploitation. Oil revenues make a nation's
currency appear stronger for a while, but this makes their exports more expensive and undermines
manufacturing and local economy.
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Resource Wealth Links
Unconditional access to resource wealth ensures politicians act in their own interests
rather than benefit the local economy
Keenan, University of Illinois associate professor of law, 9
(Patrick J., 2009, “CURSE OR CURE? CHINA, AFRICA, AND THE EFFECTS OF
UNCONDITIONED WEALTH”, Berkeley Journal of International Law, vol. 84, Lexis, accessed
7/13/13, JZ)
One economic explanation for the resource curse is that resource wealth has the effect of reallocating
domestic production in inefficient ways. On this account, the resource sector pulls capital and labor
away from other sectors that might, over the long term, be more likely to improve social welfare or
might improve social welfare for more people. Similarly, resource wealth can undermine the
incentives that might produce responsive political institutions or efficient policies. Put another way,
when domestic institutions do not create sufficient barriers to "discretionary redistribution" of resource
rents and political power, the result can be a "redistributive struggle" in which "a greater share of
resources ends up in nontaxable inefficient activities" than would be optimal. n130 My focus here is not
on the policies adopted to manage the wealth but on the ways that leaders and aspiring leaders attempt to
gain and retain power.
When natural resources are described as a curse, one prominent reason is the effect that resource wealth
seems to have on the way politicians act. There is no way to know how politicians respond to incentives.
Consider first the most general issue: whether states that derive most of their income from oil revenues
score worse on various measures of democracy. The available evidence suggests that resource revenues
are associated with weaker democracies. n131 More specifically, resource wealth does not appear to
destroy well-functioning democracies. n132 Instead, it appears to strengthen autocratic regimes and
delay or prevent transitions to democracy that might otherwise be expected. n133
Unconditioned wealth shapes the incentives politicians face in three areas. First, if political power is
the primary means to obtain access to wealth, politicians have a strong incentive to retain power for as
long as possible. Consequently, unconditioned wealth creates an incentive to centralize control of
access to the source of the wealth. Second, unconditioned wealth can lead politicians to cease to rely
on taxes or other sources of revenue available only if [*112] the politician is at least moderately sensitive
to the wishes of citizens. Finally, when political power and wealth are so closely linked, and when
politicians can distribute resource revenue however they wish, there is a strong trend to increase the
number of government jobs beyond an optimal level.
In many poor countries, the path to wealth almost invariably leads through political office. This is
particularly true in resource-rich states in which the government controls access to the revenue generated
by resource extraction. When this is the case, those in power have an incentive to maintain tight
control over access to resources, and incumbency can emerge as a substantial advantage. n134 Broadly
speaking, the evidence supports this intuition. For example, other things equal, states that derive a
substantial portion of their revenue from oil wealth tend to have regimes that are longer-lived n135 and
less democratic than would otherwise be expected. n136
It is, of course, difficult to determine exactly why this is so. Consider the example of Nigeria. There, the
state-owned oil company is a partner in every project relating to the country's abundant oil and natural
gas, which ensures that government ministers have a constant source of revenue. n137 Such an ownership
structure is perfectly rational from the perspective of a politician concerned with staying in power, but it
can undermine political accountability for two primary reasons. First, only incumbent politicians (and
their allies) have access to resource rents. This means that the advantages of incumbency - present in
virtually every democracy - are multiplied significantly, which gives incumbents a strong incentive to
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stay in power. n138 Second, potential challengers to incumbents see the same landscape as do
incumbents. This could have the effect of driving honest leaders from politics or attracting leaders whose
only interest is money.
Another explanation for the negative political effects of resource wealth again begins with the assumption
that in states rich with resources, those in power will spend prodigiously to remain in power. If this is
true, do resource-rich governments spend resource wealth to purchase stability, and if so, what are
the effects of this spending? In Africa, states "with large natural resource [*113] endowments have
higher levels of government consumption than resource-poor countries." n139 Governments can spend
this wealth in several ways. One way for incumbent politicians to maintain support is to increase the
number of public-sector jobs. This strategy, while useful to those who receive the new jobs and the
politicians who may be more likely to be reelected, comes at the cost of "transferring labor from the
relatively high productivity private sector to the low productivity public sector." n140 Another strategy
is to put in place economic policies to win favor with consumers, by ensuring low prices for
consumer goods, and loyal producers, by ensuring low prices for inputs.
Domestic energy reliance has historically caused increased levels of corruption and
governmental degradation – exceptions are not the rule
Pacific Environment press release, 13
[States News Service, 2-15-13, “THE CURSE OF CRUDE”, Lexis, accessed 7-12-13, JB]
The following information was released by Pacific Environment:
At least since the beginning of the financial crisis in 2008 it's been a common refrain throughout the
world that countries must crank up resource extraction projects to stimulate economic development.
It's an easy argument - more resources equal more money which creates better economic conditions
- and it's also wrong. A New York Times article published February 13 contradicts a lot of
conventional wisdom about natural resources and economic development, claiming that valuable
natural resources, especially oil, are a "curse" that often leads to increased corruption, poor
governance, and poverty. It's a sobering thought as politicians throughout the Pacific region ponder
increased resource development in the next few years.
Evidence of this "curse" is everywhere in Russia, one of the world's largest oil and gas exporters.
While luxury boutiques and car dealerships are opening in large cities, ubiquitous unemployment,
poverty, and decaying infrastructure persist everywhere else. Why? Because oil drilling requires
lots of capital and technology but relatively few people. So much for "job creation." And a ruble
inflated by oil exports causes labor-intensive manufactured products to lose value at home and abroad.
Even in Moscow, everything but vodka is stamped "Made in China." Because Russia's tax coffers are
filled primarily with petrodollars instead of taxpayer contributions, the governing class has no
incentive to meet the needs of the broader population. The result is rampant corruption, an
increasingly repressive political climate, collapsing infrastructure, environmental degradation on a
massive scale, and complete government unresponsiveness. It's no surprise that government officials are
adopting increasingly desperate measures to prevent civil society from undermining their nationwide get
rich quick scheme.
But this curse doesn't affect all resource-rich territories, right? What about Norway? Norway is
something of a special case, fortunate enough to have developed democratic institutions before it
discovered oil. And what about the United States? While it may be true that the U.S.'s vast
resources haven't caused us to sink into despotism, it's hard to argue that they have been a net
benefit. For starters, resource rich areas tend to be among the most economically unstable and
depressed, subject to the booms and busts of national and international resource markets. They also
tend to suffer from poor education, degraded public health, and crime (think West Virginia coal
country or south Texas oil land). And can you think of a lobby that exerts a more corrupting influence on
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this country's politicians through lobbying and campaign contributions than the oil and gas industry?
There are some bright spots (Alaska for example, where the Alaska Permanent Fund pays annual
dividends from oil profits to each citizen), but it seems clear that the world's addiction to fossil fuels has
not been good for the majority of people on the planet, to speak nothing of the environment.
Russia is far from the only example of the resource curse. Look to Venezuela, Nigeria, and the Middle
East for other countries with high levels of both resource wealth and misery. These countries' and our
own experiences should be a warning to anyone certain that expanded Arctic drilling or the Keystone XL
pipeline will bring more money and a better life. The lesson seems clear: reliance on oil may make some
people rich, but it leaves most in the lurch.
Resource wealth can and will cause serious damage to countries with smaller
economies – Dutch disease and lack of planning
Maputo, 12
(Agencia de Informacao de Mocambique, Published July 12 2012, Africa News
“Stiglitz Warns Against IMF 'Inflation Targeting’”, lexis, accessed July 13 2013, JB)
Nobel economics laureate Joseph Stiglitz warned in Maputo on Thursday against following advice by
the International Monetary Fund (IMF) that would make the fight against inflation the number one
priority of economic policy.
Addressing an overflowing public meeting organised by the anti-corruption NGO, the Centre for Public
Integrity (CIP), Stiglitz, who is also a former chief economist at he World Bank, said he had been
"appalled" to discover that the IMF wants to impose "inflation targeting" on Mozambique.
He argued that, while low inflation might be desirable (and he praised the Bank of Mozambique for its
handling of inflation, currently at historically low levels), it could not be the main goal of economic
policy, which should also take into account such considerations as growth and employment.
The main weapon against inflation has always been interest rates - but high interest rates risk destroying
small and medium sized businesses. Stiglitz noted that the interest rates charged by Mozambican
commercial banks are already far too high, and that is in a situation of low inflation.
The crippling impact of high interest rates could be ameliorated where there is an alternative to the
commercial banks. Stiglitz noted that Brazilian banks also charge exorbitant interest rates - but this does
not damage the Brazilian economy, since Brazil has a development bank, the BNDES, controlling more
resources than the World Bank does, which can provide cheap loans to businesses.
Stiglitz warned against excessive concentration on natural resources (such as the coal and natural
gas that Mozambique possesses in abundance). Countries dazzled by their resources had often fallen
victim to the "resource curse" - their growth rates were slower than those of countries without
resources, and their societies were much more unequal. Stiglitz warned that inequality is damaging,
and that "by creating a more equal society, you can have a stronger economy".
He cited the case of Venezuela before the rise to power of the populist leader Hugo Chavez. Then,
despite Venezuela's oil wealth, 60 to 80 per cent of the population lived in poverty. Venezuela had
not prospered as well as, for example, Costa Rica, a Latin American country with very few natural
resources.
The "resource curse" was not inevitable - among the countries that had used their resources well,
Stiglitz said, were Botswana, Norway, Malaysia and Chile.
He pointed out that, despite all talk of "win-win" solutions, there are fundamental conflicts involved in
natural resource exploitation - notably between private business and the public interest. While private
mining companies always want to pay the lowest possible price for the resources, it is in the public
interest that they should pay the highest possible price.
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Stiglitz favoured heavy taxes on mining companies, and insisted that in the long run countries can only
benefit from their resources under the ground if they invest the money those resources earn in facilities
for the public good above the ground.
"You can govern by depleting resources", Stiglitz said. "But if you don't invest the money above the
ground, you become poor. You diminish your future".
He also warned of the "Dutch disease" - the phenomenon whereby an increase in revenue from natural
resources makes the local currency stronger, and thus damages manufacturing, since the country's
industrial exports become more expensive. This leads to companies closing down and the loss of jobs.
Stiglitz urged against overvaluing the currency, and suggested that overvalued exchange rates were
among the reasons for the de-industrialisation that had happened in Africa over the past quarter of a
century.
He also called for better contracts, and if necessary the renegotiation of contracts. He regarded as
nonsense the idea that contracts are sacred. "Renegotiation has always been part of capitalism", he
pointed out.
Stiglitz noted that the Botswana success story began with renegotiating the unfair contract that the South
African diamond company, De Beers, had secured prior to Botswana's independence. De Beers had
initially protested, but eventually came to agree that a fairer contract was in its interests as well as those of
the Botswanan public. Among other countries that had successfully renegotiated contracts were Australia,
Bolivia and Venezuela.
Contracts should also clearly hold companies responsible for environmental damage. "You have to
remember - the companies have good lawyers", he said, "and they're thinking 'If things go bad, how do
we ensure our shareholders don't lose money?'".
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Energy Focus Links
Energy focus displaces democratic reforms
Higgins, Washington Post, 10
(Andrew Higgins, The Washington Post foreign correspondent, Published March 5 2010, “If these
mansions could talk . . .; Pricey deals in Dubai raise questions about Azerbaijani leader's affluence”, lexis,
Accessed July 13 2013, JB)
Kerimli said Washington paid too much attention to security and energy issues and thus "sent a
signal to our country that democratic reform is not important." When Richard B. Cheney visited
Baku as vice president in 2008, he not only held talks with President Aliyev focused on energy but
also met with executives of BP and the U.S. oil company Chevron, both of which have operations in
Azerbaijan, as do Exxon and other foreign oil companies. Azerbaijan and the United States,
Cheney said, "have many interests in common."
The Obama administration has also focused on strategic issues in its relations with Azerbaijan. On
a visit to Baku two weeks ago, William J. Burns, undersecretary of state for political affairs, praised
Azerbaijan for supporting the United States in Afghanistan and trumpeted the role of a U.S.backed oil pipeline from Baku to Turkey that broke Russia's stranglehold on energy exports from
the Caspian Sea.
In a speech, Burns avoided direct criticism of Azerbaijan, noting only: "We also believe that the
strengthening of democratic institutions, rule of law and respect for human rights will have a
positive effect on the future of this country."
Energy focus legitimizes retreat from democracy
Higgins, Washington Post, 10
(Andrew Higgins, The Washington Post foreign correspondent, Published March 5 2010, “If these
mansions could talk . . .; Pricey deals in Dubai raise questions about Azerbaijani leader's affluence”, lexis,
Accessed July 13 2013, JB)
Problem for Washington
The transactions sharpen a dilemma that has shadowed Washington's relations with Azerbaijan for
years: how to reconcile the United States' security and energy interests in the oil-rich Caspian Sea
nation with what the State Department, in a report last year on human rights around the world,
described as the "pervasive corruption" of its increasingly authoritarian regime.
Azerbaijan has sent troops to support U.S. democracy-building efforts in Afghanistan and Iraq but
at home has retreated steadily from democratic practices, according to diplomats and experts on the
region. Transparency International, in a 2009 survey of global corruption, ranked Azerbaijan among
the worst at 143 out of 180 nations.
In addition to recording nine properties owned by Heydar Aliyev, the now-12-year-old schoolboy,
Dubai's Land Department also has files in the names of Leyla and Arzu Aliyeva. President Aliyev has two
daughters with the same names and roughly the same ages. Their exact dates of birth could not be
established, but various reports indicate Leyla's birthday is the same as that of the Azerbaijani woman
who figures in the Land Department records.
In all, Azerbaijanis with the same names as the president's three children own real estate in Dubai worth
about $75 million, property data indicate. Dubai real estate dealers with knowledge of some of the
transactions said the purchases were made by a buyer representing Azerbaijan's ruling family. The dealers
said the properties were paid for upfront.
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Ali Kerimli, chairman of the Azerbaijani Popular Front, an opposition party, said in a telephone
interview, " We all know that our country is one of the most corrupt ." But when told about the Dubai
purchases, he added that he was surprised at the apparent lack of effort to conceal them.
Azerbaijan's leaders, Kerimli said, "face no danger" because the judiciary, anti-corruption bodies
and most of the country's media outlets are firmly under their control.
The rush to move assets overseas, often with scant regard for returns, is a common feature of many
oil-producing nations, where corrupt elites seek to ensure that their wealth is safe just in case
political winds at home change. The phenomenon is part of the "resource curse," an ailment that
has deformed the economies and politics of corruption-addled, oil-producing nations from Nigeria
to Venezuela.
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Disaster Relief Links
Natural Disaster funds are highly susceptible and responsible for corruption and
mismanagement
Nyden, Ph.D. from Columbia University and is a reporter for the Charleston
Gazette and Monthly Review, 6
(Paul, Published September 10 2006, Charleston Gazette (West Virginia) “Professors link disasters,
fraud”, lexis, Accessed July 13 2013, JB)
Two West Virginia University economic professors are drawing national attention for their recent
research suggesting a link between natural disasters and political corruption.
"Natural disasters create resource windfalls in the states they strike by triggering federally
provided natural disaster relief," write Peter T. Leeson and Russell S. Sobel in their paper titled
"Weathering Corruption."
"Like windfalls created by the 'natural resource curse' and foreign aid, disaster relief windfalls
may also increase corruption," they say.
Television news programs on CBS, CNBC and CSPAN have interviewed the two.
When the Federal Emergency Management Agency sends relief funds of $1 per capita into a state, it
boosts corruption in that state by nearly 2.5 percent, according to the research, which was published by
the Mercatus Center at George Mason University in Washington.
Eliminating all FEMA relief funds, the authors found, would cut corruption by more than 20 percent
in a typical state, they say.
"Bad weather by itself is unlikely to impact corruption," Leeson and Sobel admit at the outset of their
study. "However, the windfall of federally provided resources that follow bad weather is not so
innocent."
Private vendors, given the responsibility to administer and distribute post-disaster supplies, often
make decisions based on illegal "side payments" to themselves or their friends, they write.
In 2002, 16 officials were indicted in Buchanan County, Va., after flooding hit the area and federal
aid flowed in.
The biggest boondoggles unfolded after Hurricanes Katrina and Rita.
A new study by the federal General Accountability Office estimates that $1 billion was stolen nearly 19 percent of the $5.4 billion in funds FEMA sent to Gulf Coast states.
Public officials may also make money by sending government funds to private contractors or
private individuals in exchange for bribes or kickbacks.
"For example," Leeson and Sobel write, "a FEMA inspector may agree to overstate the damage the
private individual incurred in return for a bribe."
Sometimes, the corruption is blatant.
Earlier this year, Louisiana police caught one FEMA contractor trying to sell a stolen federal housing
trailer for hurricane victims on the black market. That contractor apparently planned to pocket the
proceeds.
Leeson and Sobel found that Louisiana was the nation's most corrupt state, while New Hampshire was the
most honest.
Their statistical analysis showed other government funds flowing into a state did not have the same
effect.
"Both non-FEMA-related state discretionary spending and federal spending are insignificant. Only
FEMA relief impacts public corruption."
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Venezuela Oil Links
Furthering Venezuela’s dependence on oil would cause instability when the oil
inevitably runs out
Drezner, Tufts University international politics professor, 13
(Daniel, 5/7/13, personal website, “Will energy abundance destabilize world politics?”,
http://drezner.foreignpolicy.com/posts/2013/05/06/will_energy_abundance_destabilize_world_politics,
accessed 7/13/13, JZ)
A standard take on how energy affects world politics is Tom Friedman's "First Law of Petropolitics[1]" -the belief that high energy prices cause energy exporters to act in more belligerent ways. What if the
opposite is the case, however?
The Atlantic's Charles Mann has a long, winding cover story[2] on the growth of non-traditional
hydrocarbon energy reserves -- shale gas, methane hydrate, and so forth -- and what that could mean for
world politics. The good parts version:
Shortfalls in oil revenues thus kick away the sole, unsteady support of the state—a cataclysmic
event, especially if it happens suddenly. 'Think of Saudi Arabia,' says Daron Acemoglu, the MIT
economist and a co-author of Why Nations Fail. 'How will the royal family contain both the mullahs and
the unemployed youth without a slush fund?' And there is nowhere else to turn, because oil has
withered all other industry, Dutch-disease-style. Similar questions could be asked of other petro-states
in Africa, the Arab world, and central Asia. A methane-hydrate boom could lead to a southwest-tonortheast arc of instability stretching from Venezuela to Nigeria to Saudi Arabia to Kazakhstan to
Siberia. It seems fair to say that if autocrats in these places were toppled, most Americans would not
mourn. But it seems equally fair to say that they would not necessarily be enthusiastic about their
replacements.
Augmenting the instability would be methane hydrate itself, much of which is inconveniently
located in areas of disputed sovereignty. 'Whenever you find something under the water, you get into
struggles over who it belongs to,' says Terry Karl, a Stanford political scientist and the author of the
classic The Paradox of Plenty: Oil Booms and Petro-States. Think of the Falkland Islands in the South
Atlantic, she says, over which Britain and Argentina went to war 30 years ago and over which they are
threatening to fight again. 'One of the real reasons that they are such an issue is the belief that either oil or
natural gas is offshore.' Methane-hydrate deposits run like crystalline bands through maritime flash
points: the Arctic, and waters off West Africa and Southeast Asia.
In a working paper[3], Michael Ross and a colleague, Erik Voeten of Georgetown University, argue that
the regular global flow of petroleum, the biggest commodity in world trade, is also a powerful
stabilizing force. Nations dislike depending on international oil, but they play nice and obey the rules
because they don't want to be cut off. By contrast, countries with plenty of energy reserves feel free to
throw their weight around. They are 'less likely than other states to sign major treaties or join
intergovernmental organizations; and they often defy global norms—on human rights, the
expropriation of foreign companies, and the financing of foreign terrorism or rebellions.' The implication
is sobering: an energy-independent planet would be a world of fractious, autonomous actors, none
beholden to the others, with even less cooperation than exists today.
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Cuba Oil Links
If Cuba develops oil, it will suffer from resource curse
Betancourt, University of Maryland economics professor, 12
[Roger R., B.A. from Georgetown & Ph.D. in econ from U of Wisconsin, 2012, University of Maryland
College Park, “Oil and Democracy in Cuba: Going Towards Nigeria or Norway?*” p. 6,
http://econweb.umd.edu/~betancourt/development/oil%20democracy.aug.2012.pdf, accessed 7/13/13,
MC]
Thus, if one looks at the details of the political system in terms of political rights and civil liberties
thirty some years after the oil discovery, democracy in Norway has attained a maximum level reflective
of the judgment that it does not suffer from a political natural resource curse. Similarly, the scores on the
details of the political system in Nigeria can be used as a measure of what is consistent with a
country that suffers from the political natural resource curse.
With this as a background we can now consider what to expect in terms of the political natural resource
curse with regards to Cuba if significant amounts of oil are found. Cuba attained its independence in
1902 and became a Republic that can be characterized as having a system of government associated with
presidential democracies. The Republican regime suffered a series of interruptions that included: one
major American intervention between 1906 and 1908; a period of instability after the so- called
Revolution of 1933 that ended in 1940; democratic civilian governments between 1940 and 1952, which
ended with a military coup that lasted until 1959; and a communist regime afterwards that is still in
place.3
Just like Nigeria the oil discovery if it happens in the very near future will take place under a nondemocratic regime. Moreover, past governmental performance in the provision of those public goods
and services associated with a market economy casts doubts on the legitimacy and stability of the
current regime. Both of these characteristics suggest a political resource curse similar to Nigeria’s
rather than an outcome similar to Norway in the political sphere.
If substantial amounts of oil were to be discovered through the current offshore deepwater
exploration in Cuban waters, the rents generated would provide strong incentives for the current
government to avoid democracy in order to appropriate these rents. Given the repressed consumption of
the last decades by the majority of the population, the pressure to use the oil income to provide benefits to
stay in power along the lines suggested by Morrison’s arguments would be great. Inflation is an almost
certain outcome. The main uncertainty is whether it would be disguised or highly visible. In the former
case this could happen through the current dual monetary system or through manipulated figures as in
Argentina or both.
Development of natural resources by autocracies, like Cuba, fails to develop the
economy
Frankel, Capital Formation & Growth Prof at Harvard, 12
[Jeffrey, 11/2/12, Presentation at University of Havana, “The Natural Resource Curse: Causal Channels,”
p. 16, www.hks.harvard.edu/fs/jfrankel/NRCurseCauses2012Cuba.ppt, accessed 7/13/13, MC]
3. Autocratic or oligarchic institutions may retard economic development.
Countries where command of natural resources by government or a hereditary elite automatically
confers wealth on the holders
 are likely to become rent-seeking societies; and are less likely to develop the institutions
conducive to economic development,
Gonzaga Debate Institute 13 30
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

e.g., decentralization & economic incentives;
as compared to countries where moderate taxation of a thriving market economy is the
only way government can finance itself.
U.S. investment in Cuban oil crushes reforms – laundry list of reasons
Orro, graduate of U of Havana, 9
[Roberto, also holds a master degree in economics from el Colegio de México, 2009, “PETROLISM IN
CUBA AND IMPLICATIONS OF U.S. INVESTMENT IN THE CUBAN OIL SECTOR,” ASCE, p.
340-341, http://www.ascecuba.org/publications/proceedings/volume19/pdfs/orro.pdf, accessed 7/13/13,
MC]
After a plethora of empirical works addressing the effects of oil on democracy and development, and
the record of Cuba over the last fifty years, it is not difficult to image the picture of an oil-rich Cuba.
Let us begin with the economic implications:
• Agriculture will surely receive the biggest negative blow. Imports of foods will rise and the chances
to overhaul Cuba’s troubled agriculture will go away. Further concessions to private farmers would
look as an improbable scenario.
• A huge inflow of petrodollars to Cuba will also hurt tourism. As it has happened since 2004, Cuban
authorities will lose interest in exploiting the full potential of tourism. They will just focus on resorts and
some tourist niches like Varadero, where foreign visitors are isolated from the population. Tourism to
big cities, which promotes interaction between foreigners and Cubans and di- rects some money
into the pockets of ordinary citizens, will continue to lose ground.
• Manufacturing will not go unscathed either. An offshore oil boom could finally kill the sugar
industry. It is noteworthy that Cuban officials court U.S. oil companies, but never mention the
island’s potential as an ethanol producer. The Cuban leadership does not like cooperation in this
sector, as they do not want thousands of Cuban workers and farmers interacting with U.S. firms.
The revival of the sugar sector, both agricultural and industrial, demands liberalizing steps that the Cuban
government refuses to take. Oil and sugar do not really mix.
• Biotechnology and pharmaceuticals, in which Cuba has made some notable strides, could fall in the
doldrums as well. Over the last 50 years, Cuba has shown a long record of replacing rather than
adding economic activity. Once the government gives priority to one sector — the one that pro- vides
revenues without political risk — they let others stagnate.
• The tertiary sector, which has a great potential in Cuba, will never blossom in an economy driven by
oil. Cuba has thousands of talented artists, sports- men, physicians, musicians, and many other professionals, living in the island or abroad. Nonethe- less, the island will not reap the benefits of these assets
until a radical reform opens the doors of the market to Cuban professionals. Under a massive inflow of
petrodollars, the Cuban government will have little incentives to do that.
As researchers have shown, oil starts its harmful work from the moment significant oil wealth is
discovered. The mere expectations that U.S. firms will enter the Cuban market will abort timid
attempts to liberalize the economy. The arrival of U.S. firms to explore and drill offshore in Cuban
waters will embolden political hardliners, those who adamantly refuse any kind of small moves
towards democracy and market economy.
The advocates of market reforms — who now can barely make a comment in favor of liberalization—
will be left in a much weaker position.
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Cuba – AT – Venezuelan Oil Influence Worse
Cuban oil is no better for Cuba’s economy than Venezuela’s subsidized oil
Orro, graduate of U of Havana, 9
[Roberto, also holds a master degree in economics from el Colegio de México, 2009, “PETROLISM IN
CUBA AND IMPLICATIONS OF U.S. INVESTMENT IN THE CUBAN OIL SECTOR,” ASCE, p.
341, http://www.ascecuba.org/publications/proceedings/volume19/pdfs/orro.pdf, accessed 7/13/13, MC]
There is an interesting argument in favor of large oil production in Cuba. The idea is that it will free
the Cuban leadership from the influence of Hugo Chávez. The implicit assumption is that energy
self sufficiency will ease conditions for the Cuban government to undertake reforms. Another
implicit and wrong assumption in this argument is that Venezuela is responsible for the stagnation
of the Cuban economy. It is worth being reminded that Venezuela did not impose such dependence
upon Cuba. Cuba rather sought it, the same way it did with the former Soviet Union.
The question is not whether oil comes from Venezuela or from the Cuban offshore. What is indeed
relevant is that too much oil under the control of a non-democratic government is a boomerang. As
long as oil supply to Cuba keeps fueling petrolism, hopes for economic liberalization will become
more distant. As many studies have documented, oil booms in poor economies thwart economic
diversification and the development of secondary and tertiary activities. Cuba will not be the exception.
The best way for Cuba to become more economically independent is by overhauling agriculture. It
will save the island billions of dollars in food imports, and will foster forward links with the rest of
the economy. In particular, it will help rescue from stagnation the sugar industry and encourage
ethanol production. In a nutshell, developed and democratic countries are not oil exporters, but
rather food exporters.
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AT – Preventive Measures Solve
Rapid investments in energy resources have historically lead to a rapid increase in
corruption, and preventive measures can be abused
Oppenheimer, Miami Herald syndicated foreign affairs columnist, 11
(Andrés, Published October 5 2011, Tulsa World Oklahoma, “Americas to become next Mecca of world's
energy”, lexis, Accessed July 13 2013, JB)
The turmoil for reform sweeping most Middle Eastern oil producers is grabbing big headlines
today, but that region may lose some of its economic clout in the future: there are signs that the
Americas will replace the Middle East as the world's biggest oil-producing region. An article in the
current issue of Foreign Policy magazine sums it up in a two-word headline: "Adios OPEC." It says the
Middle Eastern countries-dominated Organization of Petroleum Exporting Countries will lose much of its
power in the 2020s, because "the Americas, not the Middle East, will be the world capital of energy" by
then. Amy Myers Jaffe, head of the Baker Institute Energy Forum at Rice University and author of the
article, says the shift will take place because of technological and political factors.
While geologists have long known that there are huge untapped deposits of energy in the Americas,
most of these reservoirs were hidden in deep waters, shale rock or oil sands, that made them
economically unfeasible to tap. But new technologies are changing that. There are more than 2 trillion
barrels of oil from unconventional sources in the United States, plus another 2.4 million in Canada and 2
trillion in South America, compared with the Middle Eastern and North African conventional oil reserves
of 1.2 trillion, the article says. Thanks to new techniques for horizontal drilling for shale gas
production in the United States, and other new technologies to extract oil from Canada's oil sands, or from
Brazil's off-shore "pre-salt" deposits, these and other reserves in the Americas will soon become the
center of gravity of the world's oil supply, it says. In addition, the Middle East's oil production will be
affected by the political turmoil in that part of the world. "The revolution-swept Middle East and North
Africa will soon be facing up to an inconvenient truth," Myers Jaffe says. "Changes of government in
the region have historically led to long and steep declines in oil production." Libya's oil production
dropped from 3.5 million barrels a day when Col. Moammar Gadhafi toppled King Idris in 1969 to 2
million barrels over the next three decades. A similar thing happened in Iran after the 1979 revolution that
toppled the Shah, and in several other countries in the region. After reading the article, I called Mauricio
Tolmasquim, president of the Brazilian government's Energy Research Company, EPE, to ask about the
latest estimates about Brazil's "pre-salt" offshore oil deposits. Tolmasquim told me that Brazil is
expecting to increase oil production from 2.3 million barrels a day now to 6 million barrels a day in 2020,
adding that about half of the country's production will come from the newly exploited offshore deposits.
"We will almost triple our oil production by 2020, and about half of our output will be exported," he said.
"We expect to begin exporting a significant amount of oil around 2015." Won't Brazil become a victim of
the so-called "oil curse," I asked him. Most developing countries with huge oil deposits, such as
Venezuela and Nigeria, have ended up with an avalanche of dollars that led to higher inflation,
populist policies, growing corruption, autocrats, and more poverty - a phenomenon that economists
know as the "Dutch disease." Tolmasquim noted that Brazil has passed a law creating an Oil Fund,
much like Norway's, which will manage the country's oil income. The government will only be able
to use the fund's interest for health, education, and other social services, he said. "The idea of this
law was precisely to prevent a Dutch disease," he said. My opinion: The coming oil boom in the
Americas is great news. But I'm worried that many governments that will benefit from it, instead of
following Norway's steps, will not resist the temptation of tapping it for electoral purposes. During
a visit to Brazil earlier this month, I learned that the law creating Brazil's Oil Fund allows the
country's oil income to be invested both at home and abroad. That could allow the government to
Gonzaga Debate Institute 13 33
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use the funds arbitrarily. In Norway, all the fund's money is invested abroad, and its principal is
off-limits to politicians. If the Americas become the new epicenter of the world's energy production,
it could be a blessing that would help many countries advance more rapidly toward the First
World. But they should set up independently managed funds to shield their oil income from
government corruption starting now, to avoid the risk of sinking very fast back to the Third World.
Once a country changes its focus to oil diversifying investments can’t reverse the
trend
Naim, Foreign Policy editor, 9
[Moises, 8-31-9, The Devil's Excrement, Lexis, accessed 7-13-13, JB]
A common trait of resource-based economies is that they tend to have exchange rates that stimulate
imports and inhibit the export of almost everything except their main commodity. Its not that their
leaders fail to realize they need to diversify their economies. In fact, all oil countries have invested
massively in the development of other sectors. Unfortunately, few of these investments succeed,
largely because the exchange rate stunts the growth of agriculture, manufacturing, or tourism.
Then there is the intense volatility of the commodities that these countries export. In the last 24 months,
for example, oil shot up from less than $80 per barrel to $147.27, then fell to $32.40, and again moved up,
to $59.87 by mid-2009. These boom-and-bust cycles have devastating effects. The booms lead to
overinvestment, reckless risk taking, and too much debt. The busts lead to banking crises and
draconian budget cuts that hurt the poor who depend on government programs. To make matters
worse, governments faced with a windfall of revenues feel pressure to launch plans that are larger and
more complex than their bureaucracies can handle. Inevitably, the overambitious projects end up
generating enormous waste and are often abandoned once revenues drop.
Democracy, transparency, and effective public institutions are prerequisites to
effective oil investment
Naim, Foreign Policy editor, 9
[Moises, 8-31-9, The Devil's Excrement, Lexis, accessed 7-13-13, JB]
Oil is a curse. Natural gas, copper, and diamonds are also bad for a countrys health. Hence, an insight
that is as powerful as it is counterintuitive: Poor but resource-rich countries tend to be
underdeveloped not despite their hydrocarbon and mineral riches but because of their resource
wealth. One way or another, oil ” or gold or zinc ” makes you poor. This fact is hard to believe, and
exceptions such as Norway and the United States are often used to argue that oil and prosperity can
indeed go together.
The rarity of such exceptions, however, not only confirms the rule, but also serves to clarify what it
takes to avoid the misery-inducing consequences of wealth based on natural resources: democracy,
transparency, and effective public institutions that are responsive to citizens. These are important
preconditions for the more technical aspects of the recipe, including the need to maintain
macroeconomic stability, prudently manage public finances, invest part of the windfall abroad, set up
œrainy-day funds, diversify the economy, and ensure the local currency does not reach too high a
price.
Lack of governmental support increases the risk of Dutch disease and oil industry
take over
Naim, Foreign Policy editor, 9
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[Moises, 8-31-9, The Devil's Excrement, Lexis, accessed 7-13-13, JB]
Unfortunately, for most underdeveloped countries, the suggested defenses are as utopian as the
larger goal they are supposed to help achieve. Countries that already have all these institutional
strengths need not worry. For the rest, like an autoimmune disease, the curse undermines the ability
of a country to build defenses against it. Indeed, weve learned in recent years that concentrated
power, corruption, and the ability of governments to ignore the needs of their populations make it
hard to do what it takes to resist the resource curse.
Juan Pablo Pérez Alfonzo, Venezuelas oil minister in the early 1960s and one of the founders of OPEC,
was the first to call attention to the oil curse. Oil, he said, was not black gold; it was the devils
excrement. Since then, Pérez Alfonzos insight has been rigorously tested ” and confirmed ” by a slew of
economists and political scientists. They have documented, for example, that since 1975 the economies of
resource-rich countries grew at a slower rate than countries that could not rely on the export of
minerals and raw materials. And even when resource-fueled growth takes place, it rarely yields
growths usual full social benefits.
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Internal Links
Gonzaga Debate Institute 13 36
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Aid Hurts Manufacturing
Aid causes Dutch Disease – undermining manufacturing sector
Subramanian, Senior Fellow at the Peterson Institute for International Economics 9
(Arvind, Center for Global Development, and Senior Research Professor at Johns Hopkins University,
12-18-09, “The effects of foreign aid: Dutch Disease”, http://aidwatchers.com/2009/12/the-effects-offoreign-aid-dutch-disease/, accessed 7/13/13. QDKM)
The voluminous literature on the effects of foreign aid on growth has generated little evidence that
aid has any positive effect on growth. This seems to be true regardless of whether we focus on
different types of aid (social versus economic), different types of donors, different timing for the impact
of aid, or different types of borrowers (see here for details). But the absence of evidence is not evidence
of absence. Perhaps we are just missing something important or are not doing the research correctly.
One way to ascertain whether absence of evidence is evidence of absence is to go beyond the aggregate
effect from aid to growth and look for the channels of transmission. If we can find positive channels (for
example, aid helps increase public and private investment), then the “absence of evidence” conclusion
needs to be taken seriously. On the other hand, if we can find negative channels (for example, aid stymies
domestic institutional development), the case for the “evidence of absence” becomes stronger.
One such channel is the impact of aid on manufacturing exports. Manufacturing exports has been
the predominant mode for escape from underdevelopment for many developing countries,
especially in Asia. So, what aid does to manufacturing exports can be one key piece of the puzzle in
understanding the aggregate effect of aid.
In this paper forthcoming in the Journal of Development Economics, Raghuram Rajan and I show that aid
tends to depress the growth of exportable goods. This will not be the last word on the subject because
the methodology in this paper, as in much of the aid literature, could be improved.
But the innovation in this paper is not to look at the variation in the data across countries (which is what
almost the entire aid literature does) but at the variation within countries across sectors. We categorize
goods by how exportable they could be for low-income countries, and find that in countries that
receive more aid, more exportable sectors grow substantially more slowly than less exportable ones.
The numbers suggest that in countries that receive additional aid of 1 percent of GDP, exportable
sectors grow more slowly by 0.5 percent per year (and clothing and footwear sectors that are
particularly exportable in low-income countries grow slower by 1 percent per year).
We also provide suggestive evidence that the channel through which this effect is felt is the
exchange rate. In other words, aid tends to make a country less competitive (reflected in an
overvalued exchange rate) which in turn depresses the prospects of the more exportable sectors. In
the jargon, this is the famous “Dutch Disease” effect of aid.
Our research suggests that one important dimension that donors and recipients should be mindful
of (among many others that Bill Easterly has focused on) is the impact on the aid-receiving country’s
competitiveness and export capability. That vital channel for long run growth should not be
impaired by foreign aid.
Gonzaga Debate Institute 13 37
Brovero-Lundeen – Dutch Disease
Oil Hurts Manufacturing
Dependence on crude oil causes Dutch Disease — hurts the manufacturing sector —
Canada proves
Oremus, Slate, 12
[Will, 1-20-12, a Slate staff writer, M.A. in Politics and Government from Columbia University Graduate
School of Journalism, 2012 (Slate Magazine, “Saudi Arabia. Nigeria. Venezuela. Canada?; Is our
neighbor to the north becoming a jingoistic petro-state? ,”
http://www.slate.com/articles/news_and_politics/politics/2012/01/canadian_tar_sands_is_our_neighbor_t
o_the_north_becoming_a_jingoistic_petro_state_.html, Accessed on July 13, 2013)][SP]
It's well known that America's dependence on foreign oil forces us to partner with some pretty
unsavory regimes. Take, for instance, the country that provides by far the largest share of our
petroleum imports. Its regime, in thrall to big oil interests, has grown increasingly bellicose, labeling
environmental activists "radicals" and "terrorists" and is considering a crackdown on nonprofits that
oppose its policies. It blames political dissent on the influence of "foreigners," while steamrolling
domestic opposition to oil projects bankrolled entirely by overseas investors. Meanwhile, its
skyrocketing oil exports have sent the value of its currency soaring, enriching energy industry
barons but crippling other sectors of its economy.
Yes, Canada is becoming a jingoistic petro-state.
OK, so our friendly northern neighbor isn't exactly Saudi Arabia or Venezuela. But neither is it the
verdant progressive utopia once viewed as a haven by American liberals fed up with George W. Bush.
These days Canada has a Dubya of its own. And judging by a flurry of negative press from around the
world-the latest: Archbishop Desmond Tutu and other African leaders are taking out newspaper ads
accusing Canada of contributing to famine and drought on the continent-it seems anti-Canadianism could
be the new anti-Americanism.
Stephen Harper, the son of an oil-company accountant, built his political career in Alberta, a province
whose right-wing tendencies and booming energy sector make it Canada's equivalent of Texas. Harper
took over the Conservative Party in 2004 and became prime minister two years later on a platform that
evoked Bush's "compassionate conservatism." In 2009, he quelled a Bush-esque Afghan-detainee abuse
scandal by sending the parliament home to forestall further investigation. The Canadian economy
weathered the financial crisis unusually well, thanks to strong banking regulations and booming oil
sales to China, and in May 2011 Harper's party won a majority for the first time. It has celebrated by
veering rightward and doubling down on its oil bets.
Already in possession of the world's second-largest oil reserves behind Saudi Arabia, Canada under
Harper is aiming to more than double its output by 2035. Most of the new crude will come from the
tar sands of northern Alberta, which are lousy with oil-rich bitumen. But extracting and refining that
bitumen is lousy for the environment. It requires strip and open-pit mining, and the refining process is
unusually energy-intensive. Producing one barrel of oil takes two tons of tar sands and several barrels of
water.
Given that the Alberta tar sands already account for more carbon emissions than 145 entire nations, one
would think Canada would have a hard time meeting international environmental standards. One would
be right. Under a liberal government, the country was one of the first to sign on to the Kyoto Protocol in
1998. In 2002, even as Bush was gleefully thumbing his nose at the climate treaty, Canada ratified it,
promising an ambitious 6 percent reduction from 1990's carbon levels by 2012. Instead, emissions had
risen 24 percent as of 2008. And in terms of energy consumption per capita, Canada is fourth in the
world, 15 percent higher than the notoriously wasteful United States.
Gonzaga Debate Institute 13 38
Brovero-Lundeen – Dutch Disease
No worries. Last month Harper made Canada the first country to formally withdraw from the treaty,
leaving it free to pollute as much as it sees fit. That has raised the hackles of environmental groups and
other countries. When even China, the world leader in pollution, calls your environmental policies
"regrettable," you might be doing something wrong.
Far from being chastened by the outcry, the Canadian government has responded by circling the wagons
and demonizing its critics. This month, Natural Resources Minister Joe Oliver issued an open letter
accusing "environmental and other radical groups" of delaying major pipeline projects and calling for a
"quicker and more streamlined" public review process. "It is an urgent matter of Canada's national
interest," he explained. Harper has voiced concerns that public hearings will be "hijacked" by
environmental groups funded by "foreign money." Not if Harper's party members in the House of
Commons can help it: They're planning a "review" of environmental charities that many tar-sands
opponents see as a bid to limit their ability to advocate against the oil business. And Harper's
administration is boosting spending on military jets and warships while laying off hundreds in the
environmental department.
Meanwhile, Ezra Levant, a Bill O'Reilly-style TV host on a network that has been dubbed "Fox News
North" is leading an effort to brand Canada's tar sands as "ethical oil" and regularly accuses
environmentalists of abetting terrorists in Iran and Saudi Arabia. The jingoism has reached
comical proportions in recent months as Levant has fueled a popular backlash against Chiquita-yes, the
banana company-after it announced a boycott of tar-sands oil. The American corporation, he asserted,
was run by "anti-Canadian bigots." He concluded one anti-Chiquita rant by telling the company's vice
president, Manuel Rodriguez, "chinga tu madre."
Even oil-hungry America is looking askance at Canada's tar sands these days. President Obama this week
rejected the Keystone XL pipeline, which would have connected the two countries by pumping tons of
tar-sands oil straight from Alberta to Texas. Harper, for his part, quickly pivoted to China, again touting
Canada's "national interest." The pipeline he is now pushing would send the same oil to the ports of
British Columbia, crossing aboriginal lands and forests that have historically been preserved. The prime
minister has made it clear he won't let those concerns stand in his way, telling the CBC, "Just because
certain people in the United States would like to see Canada be one giant national park for the northern
half of North America, I don't think that's part of what our review process is all about."
With less than 4 percent of its GDP tied up in the oil industry, Canada is not dependent on oil to the same
extent as Venezuela (12 percent) or Saudi Arabia (45 percent). Still, the Canadians' increasing reliance
on crude natural resources has economists on the lookout for symptoms of " Dutch Disease "-a
phenomenon in which a natural resources boom strengthens a country's currency, making its other
exports more expensive and less competitive on the world market. Remember when buying stuff in
Canada was cheap because of the weak loonie? No more. After hitting a low of 62 cents in 2002, the
Canadian dollar is now worth essentially the same as a U.S. dollar. That's great for the federal
government's coffers but rough on industries such as manufacturing, which have lost hundreds of
thousands of jobs in recent years.
While we haven't yet reached the point where Canadians are stitching the Stars and Stripes to their
backpacks when they travel abroad, not all Canadians are buying into the rally-round-the-maple-leaf
mentality. The loudest "petro-state" cries have come from within the country's own borders. The website
"Sorry, World," in which a Canadian apologizes to the globe on his country's behalf, also has some
24,000 likes on Facebook.
Gonzaga Debate Institute 13 39
Brovero-Lundeen – Dutch Disease
Level of Development of Economy Determines Impact
What makes Dutch Disease deadly is whether or not the country experiencing the
boom has already developed technology, expertise and stability in their other sectors
Dios, UP school of economics professor, 12
(Emmanuel, treasurer of the Institute for Development and Econometric Analysis and a Professor at the
UP School of Economics, Published January 16 2012, Business World, “INTROSPECTIVE; Dutch
Disease? Make that Spanish”, lexis, accessed July 13 2013, JB)
Depending on who was talking, syphilis in the past was variously called the "French Disease," the "Italian
Disease," the "Spanish Disease," or the "English Disease" - and sometimes even the Poles got blamed.
The source of Dutch ignominy, however, has nothing to do with promiscuity but rather with a problem of
economy-fitting, perhaps, for a people reputed anyway for fastidiousness and parsimony.
In the 1960s, natural gas was discovered in the North Sea, an event that brought an unprecedented
foreign-exchange bonanza for the Netherlands, whose wealth had hitherto long been based on
manufacturing industries and an intensive agriculture. (Remember, the United Provinces preceded even
Britain as the first fully capitalist nation-state in the 1600s.)The resulting flood of foreign exchange
resulted in a dramatic appreciation of the Dutch guilder - the euro was then still nothing but a pipe dream.
As time passed, the strengthening guilder seriously eroded Dutch export competitiveness and caused a
"hollowing-out" of the other economic sectors. Manufacturing exports shrank in relation to petroleum
exports and fears grew that the country would become "de-industrialized." By 1977, the phenomenon had
become serious enough to be noted by The Economist of London, which in its typically flippant manner
called it the "Dutch Disease." Academic economists, notably Australia's Max Corden, then trained their
sights on the problem, giving it the more neutral name, "booming- sector" phenomenon or "naturalresource" curse. But "Dutch Disease" is the name that stuck.
But the term is really a misnomer for two reasons: history and history. First, in terms of impact, the
actual Dutch Disease was historically not a permanent curse - the Dutch themselves ultimately
managed to recover their manufacturing advantage and their export mojo after the oil-price boom
subsided. After all, the Dutch still had the human skills, the technology, and infrastructure, to again
take up industry and services after relative prices finally turned against the booming sector. In
textbook diagrams, the "disease" is then simply a shift in the terms of trade against tradables and in favor
of nontradables. (Think of the price line rotating around a production possibilities curve.) As long as
production possibilities are unchanged, no permanent harm is done, and the condition could be as
transitory as the measles.
The second historical reason is that, if precedence matters at all, the problem should really have been
called the "Spanish Disease." For probably the first serious and sustained resource-curse was Spain's
discovery of gold and silver in its American colonies in the 16th century (in what is now Mexico,
Bolivia, and Peru). Access to this treasure was largely responsible for the neglect of and decline of
Spanish agriculture and industry through the 16th and 17th centuries. If Spain had then had a
separate currency, this minerals-boom would have caused an overvaluation that would have caused
a trade deficit, financed by a loss of reserves.
But the process was even simpler then, since gold and silver were not simply mineral resources; they
were internationally accepted currency during that period of metallic money. Gold and silver allowed
Spain's grandees to buy their way to an indolent and extravagant lifestyle supported by the goods,
skills, and services produced by the rest of Europe. (Centuries later, Rizal railed against this by - then
ingrained Spanish proclivity and the tendency of his countrymen to emulate it.) For the rest of Europe, on
the other hand, the sudden expansion of the effective money supply from Spain caused an unheardof explosion in prices, since known as the "Price Revolution." The Dutch ultimately recovered from
Gonzaga Debate Institute 13 40
Brovero-Lundeen – Dutch Disease
their "disease", but Spain did not. The latter never really took off and remained a European laggard
until well after the Industrial Revolution and into the 20th century.
What accounts for the difference? Time and timing. The Dutch boom lasted at most two decades.
Spain's American bonanza lasted for almost two centuries. Economics is poor at predicting
differences that might result from such vastly different historical time-scales. On the scale of centuries,
not only prices change, but more important also skills, institutions, values, and culture. This was the same
reason Rizal thought that "indolence" - the result of centuries of colonization - could not easily be
reversed. The second point is timing. The Dutch contracted their disease well after they had already
developed the experience and technology for advanced industry and services. The Spanish, well
before any of that had occurred. Ask any old guitar-player: it is always easier to take up an old skill
than to acquire a new one.
Fast forward to today: the Philippines displays the same symptoms. In terms of both employment and
value-added, the share of industry has been stagnant while that of agriculture has fallen. Manufactured
exports are shrinking, partly because of the penalty from a peso that is strengthening owing to overseas
remittances. My colleague, National Scientist Raul Fabella, has voiced the most perceptive observations
regarding the current problem and its consequences.
The question is, do we have the Dutch Disease, or the Spanish one? To borrow from Fermat: I have a
conjecture which this column is too small to contain.
Gonzaga Debate Institute 13 41
Brovero-Lundeen – Dutch Disease
Hurts Competitiveness
Dutch disease leads to inflation and competitive sector industry trade off within
international markets-hampering global competition within other industries
Jahan-Parvar, East Carolina University economics professor, & Mohammadi,
Illinois State University economics professor, 11
(Mohammad R., Assistant Professor, Department of Economics, East Carolina University and Hassan,
Professor, Department of Economics, Illinois State University, Fall 2011, The Journal of Developing
Areas, Volume 45, Single Issue, Published by Tennessee State University College of Business, “Oil
Prices and Real Exchange Rates in Oil-Exporting Countries: A Bounds Testing Approach,” P.309-310,
Accessed: 7/13/13, LPS.)
The sharp increase in oil prices over the past decade has renewed interest in the “Dutch
disease” hypothesis. According to the hypothesis, the inflow of oil windfalls into an oil
exporting country may cause appreciation of the real exchange rate, reduce its
competitiveness in the non-oil exporting sector, and limit its ability to build a diversified
exports base. The culprit for the disease is the “spending effect”. More specifically,
higher oil income may increase the demand for non-traded goods, and increase their
prices relative to those of traded goods. This appreciation of the real exchange rate will
reallocate resources from the non-oil traded sector into the non-traded sector, contracting
the former to the extent that it is exposed to international competition. Early literature on the subject
includes Dornbusch (1973), Gregory (1976), Forsyth and Kay (1980), Corden
(1984), Corden and Neary (1982), Buiter and Purvis (1982), Bruno and Sachs (1982),
Eastwood and Venables (1982), Enders and Herberg (1983), Edwards and Aoki (1983),
Edwards (1986), van Wijnbergen (1984). More recent studies include Gylfason (2001),
Torvik (2001), and Stevens (2003).1
Gonzaga Debate Institute 13 42
Brovero-Lundeen – Dutch Disease
Hurts GDP
Dutch Disease has a severe impact on GDP – Most comprehensive studies conclude
neg
Ross, Assistant Professor of Political Science at the University of Michigan, Ann
Arbor, ‘99
(Michael L., Assistant Professor of Political Science at the University of Michigan, Ann Arbor. His
forthcoming book is on the impact of commodity booms on state institutions; it includes case studies of
the Philippines, Indonesia, and Malaysia, 1999, World Politics The Johns Hopkins University Press. “The
Political Economy of the Resource Curse,”
http://muse.jhu.edu/journals/world_politics/v051/51.2er_karl.html#astnote, P.300, Accessed: 7/13/13,
LPS.)
The most comprehensive study to date, however, now paints a gloomier picture. Jeffrey D. Sachs and
Andrew M. Warner in Natural Resource Abundance and Economic Growth examine ninety-seven
countries over a nineteen-year period, using regression analysis to measure the impact of mineral
and other resource exports on gdp growth. Their study shows that states with a high ratio of
natural resource exports to gdp in 1971 had abnormally slow growth rates between 1971 and 1989.
The correlation remained significant even after the authors controlled for a wide range of growthrelated variables, including initial per capita income, trade policy, investment rates, region,
bureaucratic efficiency, terms-of-trade volatility, and income distribution. 7 What accounts for this
effect? [End Page 300]
Gonzaga Debate Institute 13 43
Brovero-Lundeen – Dutch Disease
Causes Shocks
Dutch disease causes exogenous shocks-multiple countries prove
Jahan-Parvar, East Carolina University economics professor, & Mohammadi,
Illinois State University economics professor, 11
(Mohammad R., Assistant Professor, Department of Economics, East Carolina University and Hassan,
Professor, Department of Economics, Illinois State University, Fall 2011, The Journal of Developing
Areas, Volume 45, Single Issue, Published by Tennessee State University College of Business, “Oil
Prices and Real Exchange Rates in Oil-Exporting Countries: A Bounds Testing Approach,” P.310,
Accessed: 7/13/13, LPS.)
Despite a great deal of theoretical work on mechanisms of Dutch disease, formal
empirical work on the subject has received limited attention. Furthermore, available
evidence is not conclusive. Edwards (1984) finds that exogenous shocks to world price of
coffee have monetary and inflationary effects on the Colombian economy. Taylor et al.
(1986) finds a negative relation between Nigerian agricultural exports and its oil export
revenues. Warr (1986) concludes that higher oil revenues enabled the Indonesian
government to defer the much-needed currency devaluation in the 1970s, and were the
primary source of subsequent financial problems. Brunstad and Dyrstad (1997) find
significant demand and cost-of-living effects following the intensive build up period of
the Norwegian petroleum sector, suggesting that Norwegian petroleum sector has been
the culprit for the country’s weak manufacturing performance. In contrast, Bjorland
(1998) finds evidence of weak response in UK’s manufacturing but positive and
significant response in Norwegian manufacturing in response to oil and gas sector shocks.
Hutchinson (1994) finds that developments in oil and natural gas sectors of the
Netherlands, UK, and Norway had no significant effects on manufacturing sectors of
these economies, and thus there is no support for the Dutch disease hypothesis. JahanParvar and Mohammadi (2009) study the potential loss of competitiveness due to higher
oil prices in a sample of six oil producing countries using a dynamic simultaneous
equations method, and find weak evidence for the monetary channel of Dutch disease.
This paper provides a formal test of the Dutch disease hypothesis by examining
the possibility of a long-run relationship between real oil prices and real exchange rates in
monthly data for a sample of fourteen oil exporting countries. Our empirical results using
the “autoregressive distributed lag” (ARDL) model of Pesaran, et al. (2001) reveal the
existence of stable long-run relationship between real oil prices and real exchange rates
across all fourteen countries. Furthermore, analysis of the short-run dynamics reveals the
existence of unidirectional causality from oil prices to exchange rates in four countries,
from exchange rates to oil prices in two countries, bidirectional causality in four other
countries, and no causality in the remaining four countries.
Gonzaga Debate Institute 13 44
Brovero-Lundeen – Dutch Disease
Impacts
Gonzaga Debate Institute 13 45
Brovero-Lundeen – Dutch Disease
Impact – Stability
Dutch Disease vastly increases the risk of divides that lead to civil wars, genocide,
and prevent growth
Shaxson, Chatham House Associate Fellow, 7
[Nicholas, November 2007, Royal Institute of International Affairs, “Oil, Corruption, and the Resource
Curse,” jstor, p 1127-1128, Accessed 7/13/13, CB]
Consider two different hypothetical countries: Agricolia, an agricultural¶ economy, and Petroland,
which depends entirely on oil. Both are divided politically¶ between North and South. When
Southern Agricolia has a bumper crop, this doesn't¶ necessarily harm North Agricolia. because it
doesn't take anything away from it (and¶ the North's residents may even benefit from more economic
activity nearby).
Petroland is different. The total amount of oil money available for the whole¶ country this year is a
given: it depends on world oil prices, the oil contracts,¶ technology, geology, financing and oil
production rates, and there isn't much¶ ordinary citizens can do to change any of these variables in
this economic enclave.¶ Sharing out this fixed sum of money is a zero-sum game: more for the
South means¶ less for the North. Here is a classic recipe for conflict. Now, even if North and South¶
settle on a formula, the problem isn't over yet—for the Northeast will now have to¶ compete with the
Northwest. And so on, down to village level—as inhabitants of¶ the Niger Delta, used to fighting for a
share of local spoils, will attest. The drivers¶ of conflict spread downwards, fragmenting society at
each level. For example, after¶ Nigeria's independence in 1960, the state split from three regions into
four, then¶ into twelve states, then 19, 21, 31; today there are 36. This subdivision was driven¶ to a
significant degree by divide-and-rule politics and the complaints of minorities¶ in each state about not
getting a fair share of the 'cake'. Yet each subdivision simply¶ created new configurations, new minorities
and more numerous divisions.
The economist William Easterly describes cross-country studies which highlight how ethnically diverse
societies suffer, among other things, a significantly¶ higher probability of civil war and of genocide,
and higher black market premiums,¶ as well as far lower economic growth, lower schooling rates
and fewer paved roads.¶ He points out that economists and donors, however, have paid remarkably little¶
atrention to the effects of ethnic polarization on economic growth. Analysis needs¶ to move further,
beyond seeing ethnic (and other) diversity as a static phenom-¶ enon, and understand better how
polarization and social fragmentation—and the¶ perceptions of these divisions—are affected by
conflicts over mineral money, and¶ how all these factors in turn impact on poverty, growth, corruption
and conflict.
The divisions (and perceptions of divisions) are not always ethnic or religious.¶ One case in point
would be the kind of rural/urban divide that was for years a¶ key part of UNITA rebel leader Jonas
Savimbi's discourse, and an important¶ factor in the Angolan civil wars. Divisions can involve political
factions that arc¶ not ethnically based. Another example would be horizontal divisions, such as
that¶ which is apparent in all oil-dependent countries between the charmed elites and¶ the masses
of poor. Empirically, there is plenty of evidence that more divided¶ societies perform less well than more
homogeneous ones: 'Societies divided into¶ factions fight over division of the spoils,* Easterly wrote;
'societies unified by a¶ common culture and a strong middle class create a consensus for growth—
growth¶ that includes the poor." (In fact, he characterized the idea of factions acting in their¶ own
interests as being chiefly responsible for bad government policies as the key¶ insight in the field of
political economy.)
Gonzaga Debate Institute 13 46
Brovero-Lundeen – Dutch Disease
Impact - Economy
Economic dependence on oil blurs reality and leads to Dutch Disease — risks
economic collapse and corruption
Shlapentokh, Michigan State University sociology professor, 6
[Vladimir Shlapentokh, professor of sociology at Michigan State University, PhD in economics at the
Institute of Economics, Soviet Academy of Sciences, postdoctorate degree in economics at the Institute of
International Economy and Relation, 2006 (“Intoxicated by high oil prices: Political Dutch disease
afflicting the Kremlin,” Oil & Gas Journal, General Interest, Comment, p.18, 11-06-06, Available Online
at http://www.ogj.com/articles/print/volume-104/issue-41/general-interest/intoxicated-by-high-oil-pricespolitical-dutch-disease-afflicting-the-kremlin.html, Accessed on July 13, 2013)][SP]
One of the best known ideologues of Russian nationalism, the vice-chairman of the State Duma's
committee on international relations Natalia Narochnitskaia, saw the "energy card" as an instrument that
would allow Russia to be a great power again and release it from its inferiority complex. Inspired by the
new perspective, Narochnitskaia suggested that Russia could serve as a model for the world. n4 The
author of an article in Komsomolskaia Pravda declared, "Russia is becoming an energy empire" and
said it has returned to "great politics through the pipeline." Some Russian authors contend that the
aggressive policy of the US against Russia is dictated exclusively by the desire to take control of the
country's oil resources.
Obsessed with the restoration of the Russian empire, the notorious nationalist Alexander Prokhanov
talked about oil as the main strategic resource of the 21st Century and praised Venezuelan President Hugo
Chavez, a "Russian friend," whose policy is also based on oil. n5 As a typical element of the political
landscape, a member of the St. Petersburg legislature rudely rejected attempts to criticize the regular
murders of non-white foreigners in the city by claiming that, with the price of oil at $80/bbl, the Russians
can do what they please. Among the 80 legislators, only one publicly denounced those comments.
A content analysis of 50 national newspapers produced remarkable results: Between February and July,
2005, the press mentioned "oil" in 7,285 articles and mentioned "gas" in 8,313 articles, while other
important subjects were mentioned less often, including "inflation" (3,565 articles), "corruption" (3,354
articles), and "crime" (1,569 articles).
With the idea that oil has provided them with an advantage over their enemies, Russian nationalists
are inebriated with thoughts of revenge. In their dreams, they see the US crawling before the Russian
oil giant, begging for a few drops of oil. With almost sadistic pleasure, some Russian journalists, such as
Evgenii Anisimov from Komsomol'skaia Pravda, suggested that because of Russia's new role as a
supplier of energy, "Europe is scared," and "her resources of energy are close to exhaustion."
It is not surprising that, under the impact of the Kremlin's "oil propaganda," the Russians were glad to see
Moscow force Ukraine to accept, at the end of 2005, a four-fold increase in the price of gas. The absolute
majority of the Russian public--80% in the country as a whole and 94% in Moscow and St. Petersburg-unequivocally supported the Kremlin's position in the December 2005 gas conflict.
Dutch disease
As suggested by many economists, Dutch disease--a country's excessive dependence on the export of
raw materials--can have serious economic consequences as a country becomes increasingly
dependent on that raw materials sector. Other branches of the economy, such as manufacturing,
often decline because of the concentration of such resources as oil or gold, as happened in 16th
century Spain. A sudden fall in the price of the raw materials could bring an economic collapse.
Seemingly, the Russian leaders, like their colleagues in Venezuela and Iran, see the world through the
prism of oil revenues. It goes without saying that one of the first victims of the political Dutch
disease is democracy.
Gonzaga Debate Institute 13 47
Brovero-Lundeen – Dutch Disease
However, an even more dangerous consequence of the political Dutch disease is the leader's loss of a
sober assessment of reality. Under the impact of their technological achievements, both Stalin and
Khrushchev, with their skewed visions of reality, moved the country closer to a major war. Putin's
euphoria over oil prices may not be as great as his predecessors' enthusiasm, but his aggressiveness in
foreign policy in general, and toward the US and Russia's neighbors in particular, has clearly increased
since 2005. The shift occurred in late 2005 when Moscow brandished its gas weapon against Ukraine
and indirectly against Europe. Russia's foreign policy has hardened (despite some cooperative
gestures toward the West) and influenced several international conflicts, including issues surrounding
North Korea, Iran, and the Middle East.
The conspicuous demonstrations in July of friendship with Venezuela's Chavez, another political leader
inebriated by oil revenues, and the readiness to sell him weapons despite American protests were clear
signals of unfriendliness toward the US. Russian media treated Moscow's attitudes toward Chavez as an
obvious demonstration of disregard toward American concerns.
Dmitry Medvedev's proposal to make the ruble fully convertible in an attempt to renew the
currency's international status was another result of the country's oil fever. Medvedev talked
contemptuously about "the financial irresponsibility of the United States," citing the country's growing
national deficit. He also denounced the International Monetary Fund's attempt to promote market reforms,
forgetting that only a few years ago Russia had scrounged for credits from this bank.
Oil fever has not infected all Russians. The level of enthusiasm among the general public and
particularly among experts does not match the levels observed after Sputnik and cosmonaut Gagarin were
launched into space, to say nothing of the excitement after the 1945 war victory. Among the most
persistent critics of the oil frenzy is Egor Gaidar who suggested that the leadership's oil delirium and
its disregard for the instability of oil prices were dangerous to the country. Several independent
politicians and journalists have seconded Gaidar's critique of the Kremlin's "hydrocarbon doctrine,"
demonstrating concern for the "time bomb in our political system."
Concerned about the Kremlin's "muddled vision of the world," some independent minds in Russia, such
as Dmitry Muratov, the editor of Novaya Gazeta, insisted: "The intellect of the government changes
inversely with the price of oil." n6 Leonid Radzikhovsky, a famous liberal journalist, wrote about the
inverse correlation between the level of democracy and the price of oil. What is more, even Vladislav
Surkov, until now the Kremlin's leading ideologue challenging Medvedev, in a struggle for influence over
Putin, suggested that, with gas as its only basis, the Russian economy would inevitably reveal its fake
prosperity in the "post-hydrocarbon era."
Russia is not the only country in the world that is obsessed with oil. Every country, in one way or another,
is preoccupied with oil. While the US, Europe, China, and India are concerned about fuel supply and
the adverse influence of high oil prices on the economy and standard of living, several countries,
including Russia, have turned their oil resources into weapons for achieving their domestic and
foreign goals. As the experiences of Stalin and Khrushchev showed, Russian leaders sometimes
overstretch the potential of their advantages and lose a sober perspective of reality.
Mesmerized by his clout, Putin may accept "the invitation" of the Russians to stay in power after 2008.
Today, 51% of the Russians would vote for him if he decided to try for a third term, which he promised
not to do. In the foreign arena, Putin has already shown less willingness to cooperate with the West and
the US in particular. His foreign policy may harden even more. However, it is unlikely that Moscow will
demonstrate direct hostility toward the West in the near future.
The post-Soviet space is another story, however. The idea that oil will allow Russia to take control over
Ukraine, Georgia, and Belorussia is deeply engrained in the minds of Kremlin politicians. We can expect
an exacerbation of the political developments in the post-Soviet space, which will undoubtedly
complicate relations with the West.
Aside from the damage to Russia's international relations, the oil delirium is more problematic to the
country's long-term national interests. The over-confidence in oil revenues may lead to a decline in
the spirit of entrepreneurship, to a refusal to modernize industry, or even to an acceptance of
deindustrialization. The obsession with high oil prices explains why the Kremlin sees few obstacles to
Gonzaga Debate Institute 13 48
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the country's continued move toward an authoritative regime. It also explains the Kremlin's conspicuous
disregard for the growing problem of corruption in society. With the vision of the Russian
leadership blurred, it may become increasingly insensitive to various destructive tendencies in the
country. The impact of the price of oil on political decision-making in Russia is crucially important
to the world and should be closely monitored.
Laundry list of negative impacts – trade decline which causes wealth disparities
among states, domestic economic fluctuations, and uneven markets
Ross, University of Michigan political science professor, 99
(Michael L., Assistant Professor of Political Science at the University of Michigan, Ann Arbor. His
forthcoming book is on the impact of commodity booms on state institutions; it includes case studies of
the Philippines, Indonesia, and Malaysia, 1999, World Politics The Johns Hopkins University Press. “The
Political Economy of the Resource Curse,”
http://muse.jhu.edu/journals/world_politics/v051/51.2er_karl.html#astnote, P.300-301, Accessed:
7/13/13, LPS.)
In the early 1950s most development economists suggested that resource abundance would help the
"backward" states, not harm them. Developing states were thought to suffer from imbalances in the
factors of production: most had surpluses of labor, but shortages of investable capital. States with
abundant natural resources could most easily overcome these capital shortfalls, thanks to both their ability
to export primary commodities and their attractiveness to foreign investors. Their governments would
also find it easier to collect revenues and hence provide public goods. 8
But a minority of scholars--most of them structuralists--raised three objections to development strategies
based on resource exports. First, Prebisch and Singer argued that primary commodity exporters would
suffer from a decline in the terms of trade, which would widen the gap between the rich
industrialized states and the poor resource-exporting states. 9 Second, other scholars noted that
international commodities markets were subject to unusually sharp price fluctuations. States that relied
on commodity exports would find these fluctuations transferred to their domestic economies,
making government revenues and foreign exchange supplies unreliable and private investment
prohibitively risky. 10 Finally, a third group of skeptics argued that resource industries were unlikely
to stimulate growth in the rest of the economy, particularly if foreign multinationals dominated
resource extraction and were allowed to repatriate their profits instead of investing them locally. 11 [End
Page 301] Resource exporters would be left with booming resource enclaves that produced few
"forward" and "backward" linkages to other parts of the economy. 12
Dutch Disease leads to economic instability, trade deficits, and economic stagnation
– time frame takes out their long term claims
Ross, University of Michigan political science professor, 99
(Michael L., Assistant Professor of Political Science at the University of Michigan, Ann Arbor. His
forthcoming book is on the impact of commodity booms on state institutions; it includes case studies of
the Philippines, Indonesia, and Malaysia, 1999, World Politics The Johns Hopkins University Press. “The
Political Economy of the Resource Curse,”
http://muse.jhu.edu/journals/world_politics/v051/51.2er_karl.html#astnote, P.302-305, Accessed:
7/13/13, LPS.)
More recent research, however, suggests that export instability either harms economic growth or has
no impact at all. 22 Yet even studies that find it retards growth have so far been unable to link export
instability to the resource curse. Lutz, for example, found a negative correlation between export
Gonzaga Debate Institute 13 49
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instability and output growth for a large sample of developing and developed countries, but he
found no measurable effect for a subgroup of primary commodity exporters. 23 Two independent
efforts to link export instability to economic performance in sub-Saharan Africa, the poorest and
most commodity-reliant set of states, produced contradictory findings: Gyimah-Brempong found a
negative correlation, while Fosu found no significant effect at all. 24 According to [End Page 304] Sachs
and Warner, commodity exporters suffer from anomalously slow growth even after controlling for
the impact of export volatility.
The third argument against commodity exports--that they generate little growth in other sectors of the
economy--faded from view in the 1970s, as the governments of developing states took increasingly strong
measures to capture the economic rents that were once repatriated by foreign multinationals. In the 1950s,
virtually every major hard-rock mineral and petroleum firm in the developing world was foreign-owned;
by 1976 virtually all had been nationalized. 25 According to some versions of dependency theory,
nationalization would finally settle the problem of linkages. 26
Since the 1970s, research on linkages has decreased sharply, yet the problem of linkages has persisted.
Fosu's study of seventy-six developing states found that growth in commodity exports between 1967 and
1986 had a negligible effect on the performance of the nonexport sector. 27 The persistence of the linkage
problem may, in part, be due to efficiency constraints on export diversification. 28 But it also hints at an
undiagnosed policy failure: governments appear to have the capacity to foster linkages, yet have
commonly failed to do so.
Though the terms of trade and linkage arguments imply that developing states receive too little
revenue from their resource exports, a fourth and more recent explanation for the resource curse dwells
on the opposite problem: that a boom in resource exports can produce economic stagnation through
an effect known as the Dutch Disease.
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AT – Helps Economy
Oil investment slows job creation and magnifies social inequality
Naim, Foreign Policy editor, 9
[Moises, 8-31-9, The Devil's Excrement, Lexis, accessed 7-13-13, JB]
Whats more, the oil industry is highly concentrated and capital intensive. This means that oil-fueled
growth does not create jobs in volumes commensurate with oils large share of the economy. In many
of these countries, oil and natural gas account for more than 80 percent of government revenues,
while these sectors typically employ less than 10 percent of the countrys workforce. Inevitably, this
leads to high income inequality.
Oil investment festers corrupt and irresponsible politics – this leads to economic
decline and undermines international competitiveness
Naim, Foreign Policy editor, 9
[Moises, 8-31-9, The Devil's Excrement, Lexis, accessed 7-13-13, JB]
Perhaps even more significantly, the oil curse also nurtures bad politics, and herein lies its autoimmune
nature. Because governments of such countries do not need to tax the population to amass giant
fiscal revenues, their leaders can afford to be unresponsive and unaccountable to taxpayers, who in
turn have tenuous and often parasitic links with the state. With their ability to allocate immense
financial resources pretty much at will, such governments inevitably grow corrupt.
This explains why the many sovereign wealth funds, oil-stabilization funds, and other solutions
tried by resource-rich countries to avoid the effects of volatility, fiscal excess, indebtedness, exportinhibiting exchange rates, and other problems have rarely worked. Such funds either get raided
before the rainy days or squandered in poor investments. Almost no resource-exporting country has
been able to prevent its exchange rate from undermining the international competitiveness of its
other sectors.
Even if they increase growth, Dutch disease causes that growth to be misplaced and
hurt sustainability
van der Ploeg, Oxford Economics Professor, and Poelhekke, University Amsterdam
Assistant Professor of Spatial Economics, 9
Frederick van der Ploeg and Steven Poelhekke, July 29th 2009, Oxford University Press, “Volatility and
the natural resource curse,” http://oep.oxfordjournals.org/content/61/4/727.full.pdf+html, p. 736-737,
Accessed 7/13/13, CB]
Natural resource bonanzas reduce critical faculties of politicians and induce a¶ false sense of
security. This can lead to investment in ‘white elephant’ projects,¶ bad policies (e.g., import
substitution or unsustainable budgetary policies), and¶ favours to political clientele, which cannot be
financed once resource revenues¶ dry up. Politicians lose sight of growth-promoting policies, free
trade, and ‘value¶ for money’ management. During commodity booms countries often engage in¶
exuberant public spending as if resource revenues last forever. This carries the¶ danger of
unsustainable spending programmes, which need to be reversed when¶ global commodity prices
collapse and revenues dry up. Perhaps encouraged by¶ the Prebisch hypothesis (the secular decline of
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world prices of primary exports),¶ some developing countries have promoted state-led industrialization
through¶ prolonged import substitution to avoid resource dependency. These policies¶ may also have been
a reaction to the appreciation of the real exchange rate and¶ decline of the traded manufacturing sectors
caused by natural resource dependence.¶ Once natural resource income has ceased, policies often had
to be reversed. The¶ resulting policy-induced volatility harms growth and welfare. Table 1 indicates¶
that resource-rich countries indeed have a relatively high volatility in the¶ national income share of
government. Case studies suggest that during the 1970s¶ and 1980s many oil windfalls could have been
put to better use (Gelb, 1988).
Political scientists have also argued that states adopt and maintain sub-optimal¶ policies, and have
studied the resource curse in great detail (e.g., Ross, 1999).¶ Cognitive theories blame policy failures on
short-sightedness of state actors, who¶ ignore the adverse effects of their actions on the generations
that come after¶ the natural resource is exhausted, thus leading to myopic sloth and exuberance.¶ These
cognitive theories highlight a get-quick-rich mentality among businessmen,¶ a boom-and-bust psychology
among policy makers, and abuse of resource wealth¶ by privileged classes, sectors, client networks, and
interest groups. Of course, some¶ of these choices may well be rational when leaders have short-term
horizons due¶ to political instability or other reasons (Caselli and Cunningham, 2009).
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Impact – Democracy
Economic dependency on high oil prices hinders democracy and freedom — strong
statistical support
Charleston Gazette editorial, 6
[Charleston Gazette, 2006 (“'Petropolitics'; Oil vs. freedom,” Charleston Gazette, Editorial, pg. P4A, 5-206, Available Online at http://charleston-gazette.vlex.com/vid/petropolitics-oil-vs-freedom-64256962,
Accessed on July 13, 2013)][SP]
NOT only are Big Oil corporations reaping obscene profits from the current upsurge in petroleum cost and gouging American motorists ruthlessly - but the oil shortage also causes another evil.
Consider this: As the price per barrel increases, rulers of oil-producing countries gain more power,
because oil-hungry nations dare not challenge them, and their people have fewer freedoms. When the
price of oil falls, local freedoms expand.
That's the observation of Thomas L. Friedman, who calls it the "First Law of Petropolitics" in the new
issue of Foreign Policy magazine.
Friedman, a New York Times columnist, acknowledges that his comparisons are not perfect. Human
freedoms are difficult to quantify and impossible to compare precisely. But he offers enough examples to
make a compelling case:
Bahrain is the first Arab Gulf state to hold a free and fair election, to let women vote and to overhaul
its labor laws. Bahrain is also the first Arab Gulf state expected to run out of oil.
The people of Lebanon pushed Syrian troops out of their country in favor of democracy. "Is it an
accident that the Arab world's first and only real democracy happens not to have a drop of oil?" Friedman
asked.
In Nigeria, while oil prices were falling in the 1980s, the country enjoyed a boom in independent
newspapers. Oil prices bottomed out at $15 a barrel in 1995 and started to climb. As they rose, the
country postponed its local elections indefinitely.
Friedman charts similar inverse relationships in Iran, Venezuela and Russia.
Economic principles involved should be familiar to West Virginians. Economists have long recognized
the "resource curse," which skews a country's politics in favor of who controls that natural
resource. Instead of concentrating on how to compete and to produce products that other people want to
buy, those economies depend on the wealth generated by selling their natural resources, and
everything revolves around that industry - politics, investment and education.
Friedman cites the work of UCLA political scientist Michael L. Ross, who analyzed 113 states
between 1971 and 1997. Ross concluded that states that relied on oil or other mineral exports tended
to be less democratic. The same effect was not associated with other kinds of exports.
Further, Ross described how oil wealth hindered democracy. Oil-rich countries can afford to spend
their wealth to relieve problems that might otherwise lead to demands from people for better
government. Countries that don't have to tax their people also don't have to listen to them. Oil
wealth leads to a lot of patronage spending and can be used to prevent opposing political groups
from forming.
Friedman carries the correlation further. As oil becomes more dear, its damage to democratic
government becomes more severe, because the world community desperately wants to protect the
precarious supply, and won't risk that supply by acting against oil country tyrants.
Since Sept. 11, barrel prices have jumped from the $20-to-$40 range to past $70. That's only partly
because of violence and insecurity in the world. There has also been a great growth in the oil appetite as 3
billion new consumers in China, Brazil, India and the former Soviet Union entered the market.
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The higher the price that oil commands, the more deleterious its effects on governments where it is
produced. All this leads Friedman to conclude that cutting down on oil consumption is not just an
idealistic cause. It's a matter of national security.
"Therefore, any American democracy-promotion strategy that does not also include a credible and
sustainable strategy for finding alternatives to oil and bringing down the price of crude is utterly
meaningless and doomed to fail," Friedman writes. "Today, no matter where you are on the foreignpolicy spectrum, you have to think like a Geo-Green. You cannot be either an effective foreign-policy
realist or an effective democracy-promoting idealist without also being an effective energy
environmentalist."
Oil production directly trades off with democracy.
Betancourt, University of Maryland economics professor, 12
[Roger R., B.A. from Georgetown & Ph.D. in econ from U of Wisconsin, 2012, University of Maryland
College Park, “Oil and Democracy in Cuba: Going Towards Nigeria or Norway?*” p. 6
http://econweb.umd.edu/~betancourt/development/oil%20democracy.aug.2012.pdf, accessed 7/13/13,
MC]
A most obvious one is pointed out by Tsui (2011), who argues that large amounts of total oil wealth
provide incentives for political leaders to monopolize power over the state in order to maximize the
rents that accrue to them directly. He provides empirical evidence that countries with large
endowments of oil wealth as a result of oil discoveries have systematically lower levels of democracy
in terms of the political rights available to its citizens. While there are issues of reverse causation
between oil production or even oil wealth and political rights, Tsui’s reliance on the measurement of
endowments of oil wealth as a result of oil discoveries eliminates these concerns, or at least alleviates
them as much as one can with cross-country data. Therefore, it provides the most convincing evidence
of a causal negative relationship between oil and democracy at this time.
Once in control, oil rich governments are hard to reform – makes democratic
transition almost impossible
Naim, Foreign Policy editor, 9
[Moises, 8-31-9, The Devil's Excrement, Lexis, accessed 7-13-13, JB]
Once in power, oil-rich governments are deadly hard to dislodge. They stick around by spending
their vast public resources to buy out or repress their political opponents. Statistically, it is far less
probable that an authoritarian oil country will transition to democracy than that a resource-poor
autocracy will. Oil-rich governments spend two to 10 times more on their militaries than countries
without oil and are more prone to go to war. Most oil-exporting countries that do not have strong
democratic institutions before they start exporting crude inevitably create an inhospitable environment for
democracy.
“Petrolization” stunts democracy and reforms – Canada proves
Greenpeace press release, 12
[1-5-12, States News Service, “CANADA: CLIMATE CRIMINAL”, Lexis, accessed 7-12-13, JB]
Gonzaga Debate Institute 13 54
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In 2011, the Montreal Macro Research Board warned that the "petrolization" of Canada had created
"A severe case of Dutch Disease," weakening Canadian business sovereignty, "hollowing out
manufactured goods exporters" and making Canada "increasingly reliant" on oil and coal exports.
Like Thatcher's England Canada launched a scheme to privatise profits and socialize the costs of oil
development. In the last decade, Canada has handed out over $14 billion in tax subsidies to oil, coal, and
gas companies, while losing over 340,000 industrial jobs. A University of Ottawa study shows that oil
colony economics is the largest factor in these job losses.
"Petro-states," writes Terry Karl, become "unaccountable to the general population." To impose the oil
company agenda on their citizens, petro-regimes tend to centralize power, avoid transparency, and
create a politics of lies and deceit.
Politics as war
Twice, in 2008 and 2009, Harper shut down the Canadian Parliament to avoid inquiries into his
international deals, finances, and scandals including abusive treatment of Afghanistan detainees.
Canada now ranks last among industrial nations in honouring freedom of information requests.
Harper's perverse secrecy is typical of oil politics. "This is how petro states are made," writes
Andrew Nikiforuk in one of Canada's best news sources, The Tyee; "with a quiet infection that eats
away a nation's entire soul."
In March 2011, as Harper ran Canada from secret cabinet meetings, 156 members of the government
found Harper and his minority regime in contempt of Parliament for its refusal to share legislative
information with other elected members.
In April 2011, Canadians learned that Harper's liaison to the Canadian Association of Petroleum
Producers had previously been convicted of defrauding two Canadian banks, a car dealer, and his own
law clients, and had lobbied the Canadian government on behalf of his ex-hooker girlfriend.
The convicted felon, Bruce Carson, served as chief tar sands promoter, claiming "The economic and
security value of oil sands expansion will likely outweigh the climate damage that oil sands create."
Carson also opposed "clean energy efforts in the U.S." Canadian lobbyists undermined US low-carbon
fuel standards by lobbying the US government.
In June 2011, on national television, another Harper henchman, Tom Flanagan, advocated assassinating
WikiLeaks founder Julian Assange: "I think Assange should be assassinated," he told Canada's CBC.
Flanagan has been one of the lead architects of Harper's war on his own people. Before the 2011 election,
in Canada's Globe and Mail, Flanagan wrote, "An election is war by other means." He compared an
election campaign to Rome's destruction of Carthage, whereby they "razed the city to the ground and
sowed salt in the fields so nothing would grow there again."
Alan Whitehorn of the Royal Military College of Canada wrote, "This suggests a paradigm not of civil
rivalry between fellow citizens, but all-out extended war to destroy and obliterate the opponent.
This kind of malevolent vision and hostile tone seems antithetical to the democratic spirit." Harper's
government is now constructing barricades around the Parliament buildings, erecting more jails, and
passing tougher criminal codes. The Canadian people, who once felt proud of their democratic
institutions, now feel like the "enemy" of their own government.
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Aff Answers
Gonzaga Debate Institute 13 56
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Link Answers
Gonzaga Debate Institute 13 57
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Government Policies
The impact is exaggerated and can be offset by governments
Ross, Assistant Professor of Political Science at the University of Michigan, Ann
Arbor, ‘99
(Michael L., Assistant Professor of Political Science at the University of Michigan, Ann Arbor. His
forthcoming book is on the impact of commodity booms on state institutions; it includes case studies of
the Philippines, Indonesia, and Malaysia, 1999, World Politics The Johns Hopkins University Press. “The
Political Economy of the Resource Curse,”
http://muse.jhu.edu/journals/world_politics/v051/51.2er_karl.html#astnote, P.305-307, Accessed:
7/13/13, LPS.)
In the early 1980s, the Dutch Disease looked like a promising explanation for the ailments of
resource exporters. More recent research suggests, however, that it is less common in developing
states than originally thought, and that governments can usually offset its impact, should they feel
it necessary.
Journalists sometimes use the term "Dutch Disease" to refer to all [End Page 305] economic hardships
associated with resource exports. 29 More formally, however, it describes the combined influence of two
effects that commonly follow resource booms. The first is the appreciation of a state's real exchange rate
caused by the sharp rise in exports; the second is the tendency of a booming resource sector to draw
capital and labor away from a country's manufacturing and agricultural sectors, raising their production
costs. Together these effects can lead to a decline in the export of agricultural and manufactured goods
and can inflate the cost of goods and services that cannot be imported (the nontradable sector). 30 ¶
Empirical studies now suggest that the Dutch Disease may be less common in developing states and more
easily counteracted by governments than initially thought. 31 Gelb's study of seven oil exporters during
the 1971-83 boom found that only four showed a shift of labor and capital away from their agriculture and
manufacturing sectors and toward their resource sectors. Other studies have found that the manufacturing
sectors of most mineral economies are unharmed by export booms, though their agricultural sectors often
suffer. 32 ¶ ¶ A careful look at the Dutch Disease model helps explain why it fits many developing states
poorly. The model assumes that an economy's capital and labor supplies are fixed and fully employed
before a boom begins. Under these conditions, a booming resource sector should draw capital and labor
away from agriculture and manufacturing, thus raising their production costs. Yet developing states often
have labor surpluses, and their resource booms draw in foreign capital and labor, offsetting any local
scarcities. 33 The Dutch Disease model also assumes that domestic and foreign goods are perfect
substitutes; if this assumption is eased--reflecting the fact that manufacturers in developing states often
import intermediate goods, which become cheaper when [End Page 306] the exchange rate appreciates-then the Dutch Disease may not damage the manufacturing sector's competitiveness. 34 ¶ Each of these
four economic effects can create hardships for resource exporters. Yet to explain why these hardships lead
to persistently slow growth--the resource curse--we must also explain why governments fail to take
corrective action. Governments play an exceptionally large role in the resource sectors of almost all
developing countries and, at least in theory, have the policy tools to mitigate each of these
hardships: they can offset a steady decline in the terms of trade by investing in the productivity of their
resource sectors and by diversifying their exports; they can buffer their economies against the vicissitudes
of international commodity markets by using commodity stabilization funds and careful fiscal policies;
they can use their commodity windfalls to promote upstream and downstream linkages; and they can
counteract the Dutch Disease by maintaining tight fiscal policies, temporarily subsidizing their
agricultural and manufacturing sectors, and placing their windfalls in foreign currency to keep
their exchange rates from appreciating.
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Extraction management solves
Biron, Inter Press Service, 13
[Carey L., 5-16-13, Inter Press Service, “U.S.: RESOURCE MANAGEMENT CENTRAL TO
EQUITABLE DEVELOPMENT”, Lexis, accessed 7-10-13]
Trillions of dollars a year are being produced through extractive industries, but just a tiny percentage of
this money is impacting on the lives of poor communities in developing countries, according to a first-ofits-kind study released Wednesday.
The revenues being produced by exploiting natural resources in developing countries already massively
outweigh development-focused foreign aid flows. But according to new research from the Revenue
Watch Institute, a global watchdog group, there is a startling correlation between economic dependency
on natural resources and low human development indicators.
"The 58 countries [studied] produce 85 percent of the world's petroleum, 90 percent of diamonds and 80
percent of copper. Profits from their extractive sector totaled more than $2.6 trillion in 2010," according
to Revenue Watch's new Resource Governance Index, unveiled here Wednesday.
"Revenues from natural resources dwarf international aid: In 2011, oil revenues for Nigeria alone
were 60 percent higher than total international aid to all of sub-Saharan Africa. The future of these
countries depends on how well they manage their oil, gas and minerals."
Of those 58 countries, more than 80 percent have reportedly failed to put in place satisfactory standards
for openness in these sectors - and half haven't even taken basic steps in this regard.
Revenue Watch analysts say the findings constitute a "striking governance deficit". While such problems
have been widely known on an anecdotal basis, this is the first time these issues have been systematically
disaggregated and compared.
"The index is a real wake-up call about how far we still have to go in managing public resources
effectively and for the betterment of poor populations around the world," Warren Krafchik, director of the
International Budget Partnership, a Washington-based project that works to strengthen civil society
involvement in public budgeting, told IPS.
"Particularly now after the global financial crisis, this data shines a big spotlight on how, while resources
can still be transferred from the Global North to the South, the fact is that the South is sitting on really
substantial resources of its own. The challenge is how to use those effectively."
The new data highlight a real opportunity to do something "fundamental" about global poverty, Krafchik
notes.
"It's really not the amount of public resources that's available that's the primary obstacle to overcoming
extreme poverty," he says. "The issue is how those resources are managed and distributed."
Similarly, several analysts are suggesting the data could influence discussion on the new international
development agenda following the expiration of the Millennium Development Goals (MDGs) in 2015.
"We're talking about real money here - foreign aid can be used as leverage, but the domestic resources
issue is absolutely key," Daniel Kaufmann, president of the Revenue Watch Institute, told a Washington
audience Wednesday.
"Clearly, 2.6 trillion dollars has major transformative potential in terms of translating these natural
resources riches into human capital. Further, oil-rich states are three times less likely to democratise than
are the non-oil-rich, so this matters from a political standpoint, too. This is the development challenge of
the decade."
No resource curse
In terms of extractives governance, particular problems appear to be concentrated in northern and
southern Africa and the Middle East. Latin America, on the other hand, is seen as generally doing
better, with Brazil, Mexico, Chile, Colombia and Trinidad & Tobago all ranked in the top 10.
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The index is topped by developed countries, with Norway, the United States (though only regarding
its extractives work in the Gulf of Mexico) and the United Kingdom the only countries rated
satisfactory on all indicators. Australia and Canada (though only its sector in Alberta) are also in the top
10.
However, the governance findings are more complex, and more interesting, than a simple breakdown of
poor versus rich countries. Kaufman says the data rejects "the tired notion of the deterministic 'resource
curse'".
"The silver lining here is that there's variation - a number of countries have satisfactory performance, and
those are in diverse contexts, including in emerging economies," he notes.
"Among those that perform poorly are some very rich countries, particularly in the Gulf. Just being rich
isn't necessarily an indication that a country is performing well, and being a developing country isn't a
rationale for doing poorly."
While many are suggesting that the new index will provide an important tool for identifying country-level
problems, debate remains over how to rectify these issues. While political will in affected countries will
clearly be a paramount factor, potential roles for the international community are less clear.
According to numbers offered at a panel discussion here on Wednesday, foreign assistance won't
necessarily offer significant leverage towards greater compliance.
"Of the 46 countries with below satisfactory levels on this index, just six have external assistance levels
greater than five percent of gross domestic product, and only three are higher than 15 percent," George
Ingram, a senior fellow at the Brooking Institution, a think tank here, said, suggesting this route of
influence is a "dead end".
"However, that money can be used to enhance the performance of government capability a For
instance, on taxation, there is a new movement of acknowledging that we need to help developing
countries develop their capacity to develop their own revenues."
Over the past decade, international discussion on natural resources governance has coalesced around
a set of standards known as the Extractive Industries Transparency Initiative (EITI). According to
the EITI website, 21 countries are currently considered compliant with the initiative, while another 16 are
pending candidates.
Yet EITI is still codifying its standards, and several EITI-compliant countries fared poorly on the new
Governance Index. Advocates are particularly calling for the inclusion of contracts in the EITI
transparency requirements, and several such major reforms will be discussed next week at an EITI board
meeting in Australia.
Revenue Watch and others say the most potent role in ensuring government accountability in this regard
will fall to national-level civil society.
"Control over resources traditionally meant power, and the incentives for politicians to give that up are
really low," Carlos Pascual, a U.S. State Department official, said Wednesday.
"You have to create different incentive structures, and changing that equation will have to strengthen the
role of civil society and the political processes by which pressures can be brought on politicians to link
their ability to stay in government with how they manage the resource base. We're at the very beginning
right now on thinking about what the best models may be a but at least we're starting to have that
discussion."
No link – exchange management solves
Bernama (Mozambique), 12
[11-2-12, Malaysian Government News, No "Dutch Disease" In Mozambique, Says Mozambique's
Central Bank”, Lexis, accessed 7-13-13, AFB]
Here is the text of news released by official news agency Bernama on its website:
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The Governor of the Bank of Mozambique, Ernesto Gove, on Tuesday declared that the central bank
is prepared to do all in its power "to preserve and consolidate macro-economic stability in the
country, including exchange rate stability, as an essential condition for more and larger investments
and the consequent promotion of economic growth".
He was speaking at the opening of a one day scientific conference organised by the Bank of Mozambique,
at which the exchange rate was the main theme, Mozambican news agency AIM reported.
The exchange rate was an important variable in macro-economic management, said Gove, and it
played a role in stimulating economic activity.
He warned against the knee-jerk belief that devaluing the currency automatically increases the
competitiveness of an economy.
"For countries such as ours", Gove said, "excessive depreciation of the currency, apart from not
guaranteeing long-term gains in competitiveness, may have pernicious effects on domestic production, if
economic agents, faced with the extraordinary gains provided by the exchange rate, cease to invest in
innovation and in modernizing their productive units".
He acknowledged that some analysts (notably Nobel economics laureate Joseph Stiglitz) have
expressed worries about a possible outbreak of "Dutch disease" in Mozambique.
"Dutch disease" is the phenomenon that has occurred in countries rich in natural resources
whereby an increase in revenues from natural resources, or from foreign aid, makes the country's s
currency stronger, resulting in the nation's other exports becoming more expensive for other countries to
buy, which in turn makes the manufacturing sector less competitive.
Gove said that the central bank has, to date, not noticed any signs of Dutch disease in the Mozambican
economy.
He cited an article in an IMF magazine from 2005 which concluded that the Mozambican economy had
managed to absorb completely all foreign aid that entered, thus avoiding any harmful appreciation of the
currency.
Subsequent studies by staff of the Bank of Mozambique had also shown there is little evidence of the
occurrence of Dutch disease.
The danger of Dutch disease is now posed, not by inflows of foreign aid, but by the boom in mineral
resources. But Gove clearly thought the danger had been overstated.
"We have embraced prudent exchange management", he said, "adjusting our interventions in the
markets in order to influence, but not determine, the exchange rate so that it remains at levels
which ensure, in the medium term, real gains in competitiveness".
"Since the liberalisation of exchange rates in 1993", he continued, "the rate has floated freely and
around its equilibrium level, and there have been no signs of Dutch disease in our country".
Nonetheless, the Bank was well aware that "the exploitation of non-renewable natural resources
will require from us considerable adjustments in the operation of monetary and exchange policy so
as to ensure that the expected massive increase in export revenue from the projects now under
implementation does not endanger the external competitiveness of the exchange rate or result in
Dutch disease".
The Bank, Gove added, was proud of its role in keeping the Mozambican currency, the metical, "stable
and competitive". The metical was a credible currency, widely recognised as such outside of
Mozambique, and Gove was sure that currency stability had played a key role in attracting investment.
Increasing oil production does not cause conflict and can avoid Dutch diseasecountercyclical policies solve
Viscidi, Energy Intelligence Group Latin America Team Leader, 8
[Lisa, 6-27-8, Energy Compass, “Latin America: Mild Curse,” accessed 7-13-13, MSG]
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Examples of oil exacerbating civil conflict are rare in South America , although in Colombia ,
guerrillas and paramilitaries are funded partly through extortion. But resource revenue can aggravate
social schisms. In Bolivia , the provinces of Santa Cruz and Tarija , which produce much of the country's
oil and gas, are demanding greater control over their hydrocarbon revenues, in a struggle that pits Bolivia
's poor indigenous majority from the highlands against the European-descended minority controlling the
rich lowlands. "The distribution of natural gas has become a proxy for deeper, ethnic and regional
polarization," Shifter says.
Governments can avoid squandering resources by establishing a stabilization fund to promote
countercyclical policy. Chile has successfully smoothed out copper revenues through such a fund.
Venezuela , Ecuador and Bolivia all established similar funds in the 1990s, but have started to dip
into them to increase social spending.
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Governance Solves
No inevitable resource curse – governance policies
Craig, Voice of America News, 5-16-13
[Jill, Voice of America News, “South Sudan 'Failing' at Resource Management”, Lexis, accessed 7-10-13]
WASHINGTON - A new report says one billion people could have their lives transformed with
better governance and management of their countries' natural resources.
The study by Revenue Watch, which was released Wednesday in Washington, D.C., says that less than
20 percent of the 58 countries studied "embraced openness and accountability." These 58 countries
produce 85 percent of the world's petroleum, 90 percent of the world's diamonds, and 80 percent of the
world's copper, according to Revenue Watch.
Revenue Watch is a New York based non-profit that, according to its website, works to reduce
corruption and improve governance in resource rich countries.
The 58 countries in the study were evaluated on four factors - institutional and legal setting, reporting
practices, safeguards and quality controls, and general governance environment.
Revenue Watch says that most of the worst performers depend almost exclusively upon revenues from
natural resources as their main source of income. South Sudan, the most oil dependent country in the
world, received a failing grade, ranking 50th out of the 58 countries.
Revenue Watch analyst Marie Lintzer, an analyst with Research Watch, worked on the project.
"They don't have an open and transparent oil sector," she said. "By that, we mean that they do not publish
a lot of information about the oil revenues that they get, and their checks and balances are weak."
"And actually the only part where South Sudan scores really high on our index is regarding the
institutional arrangements," she continued. "They have laws in place and since 2011, they have issued
some laws regarding transparency in the oil sector. And South Sudan has a very high score in that
respect."
But, Lintzer added that while South Sudan may have laws on the books, such as the 2012 Petroleum Act,
implementation of the laws is a problem.
"For now, none of the government agencies have been publishing information, so you can't really find
anything," she said. "Whether it's reports that have been published by ministries, or online, that was the
main difficulty. Because you don't have any information on the sector."
South Sudan's dependence on its oil sector makes better governance a priority, according to Lintzer.
"Their entire economy is based on oil. And therefore, managing well your oil sector and having an
accountable and transparent oil sector is important for the economic development of that country and for
the sustainability of the economic growth that would go with that."
Revenue Watch President Daniel Kaufmann agreed, saying the issue is not only important for South
Sudan, but also for other countries ranking poorly on the index.
"But in terms of a development challenge of this decade, for these countries, it is the management, the
better governance, anti-corruption in natural resources," he said. "Because that is basically where
their domestic resources lie."
However, the Revenue Watch report states that being wealthy is not a precondition for good
governance of resources. The report said six of the top 11 performers on the index are middleincome countries, including Mexico, Colombia, and Peru.
"The silver lining is that some are performing satisfactorily, and that shows that it can be done,
that there's no such thing as a deterministic resource curse," Kaufmann explained. Those countries
that are doing satisfactorily are not all rich industrialized countries. And that's very interesting
news from this data report."
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Revenue Watch said the future of sub-Saharan African countries will depend on how well they manage
their oil, gas, and mineral resources.
Transparency solves – empirically proven
Naim, Foreign Policy editor, 9
[Moises, 8-31-9, The Devil's Excrement, Lexis, accessed 7-13-13, JB]
One promising new idea is to force multinational corporations to be more transparent about their
contracts, investments, tax payments, and revenues in poor countries. The premise is that more
transparent information will curtail the ability of unaccountable politicians to use national
resources as if they were their own. Not all multinationals are accountable and willing to play by these
rules, however, and it takes more than the threat of posting a report on the Internet to stop a deeply
entrenched kleptocracy from stealing.
So, is all hope lost for poor countries with rich natural resources? Not quite. Chile and Botswana
stand out as success stories on continents where the resource curse has otherwise wreaked havoc.
Their experiences confirm what we know is needed to inoculate a country from the oil curse. But why
they were able to do so is still a mystery. Answers such as œgood leadership, œstrong governance, and
œreliable institutions only serve to mask our ignorance. Unlocking the secret of what enabled these two
poor countries to successfully lift the resource curse can spare millions from the devils excrement.
But nobody has done it yet.
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Avoidable – Brazil Proves
Dutch disease is avoidable – Brazil’s governmental intervention proves
Follath & Gluesing, Spiegel columnists, 12
[Erich and Jens, 8-10-12, Spiegel, “From Poverty to Power: How Good Governance Made Brazil a Model
Nation,” http://www.spiegel.de/international/world/good-governance-series-how-brazil-became-a-modelnation-a-843591.html, accessed 7-13-13, MSG]
Lula's successor, former guerrilla fighter Dilma Rousseff, took office in 2011. In many ways, she is the
charismatic Lula's polar opposite: sober, detail-oriented and extremely involved in her work. She made
clear from the beginning that she expected those around her to take their work as seriously as she did,
scheduling cabinet sessions on Friday afternoons and presentations at 7:30 a.m. on Mondays, and banning
such phrases as "impossible" or "maybe tomorrow."
Unlike Lula, now 66 and recovering from cancer, Rousseff was quick to root out the slightest hint of
corruption, kicking out seven ministers within her first year in office. The new president devours the
files that cross her desk and has an extraordinary memory for statistics. Asked by a Newsweek reporter
whether she knew how many jobs her government had created, Rousseff replied, "1,593,527 in the first
six months."
The strategies Rousseff is implementing are ones that have emerged at the forefront in the global
debate over good governance: professionalizing political work, being willing to experiment and able
to learn.
What the current president learned from her experiences during the Lula years, during which she was
energy minister and chief of staff, stands in stark contrast to the lessons others have taken away from
globalization. Unlike the Republicans in the US or many European neoliberals, Rousseff believes in
government involvement, active industrial policies and taxes that are applied intelligently and
increased if necessary. Financial transactions are now subject to hefty fees, and a special tax assessed at
1.5 percent of each person's salary goes to support the country's arts scene. While arts budgets elsewhere
are being cut, Brazil's unique model has yielded an annual increase of 10 percent in funding for theater,
music and the visual arts.
Globalization's Major Success Story
Despite the government's ruthless intervention, regulation and taxation, Brazilian businesses have
nothing to complain about. The country's major corporations have become some of the world's
most important agricultural producers. No other company produces as much soy as the Amaggi
Group, based in Rondonópolis in central Brazil. Ethanol giant Cosan in São Paulo has surpassed German
producer Südzucker AG as the leader in that field. Belgian-Brazilian multinational Inbev is now the
world's largest brewer of beer. And Brazil is making a name for itself in areas besides consumer goods,
such as in the high-tech industry. Compressor manufacturer Embraco holds a 22 percent share of the
refrigeration market worldwide, and Embraer is the third largest-airplane manufacturer after Boeing and
Airbus.
South America's model nation is without a doubt one of globalization's major success stories,
emerging from the global financial crisis of 2008 stronger than before. Still, long-term sustainability
depends on factors beyond just those decided in Brazil's presidential palace.
The Brazilian real is now considered one of the world's strongest currencies, which can be a
nightmare, and not just for tourists. "Lately, Brazilian investors who visit me at my London office have
been saying they find even London cheap," says Jim O'Neill, whose 2001 paper on emerging industrial
nations coined the term "BRIC." O'Neill is now chairman of Goldman Sachs Asset Management.
Brazil is increasingly being flooded with cheap plastic goods, mostly from China, which choke out
small, labor-intensive domestic industries. Three-quarters of all products sold at the Brazilian festival
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Carnival, for example, come from East Asia. The country is also flooded with speculation. Despite a
series of interest rate reductions, most recently early this June, at 8.5 percent, Brazil's prime rate is
still far too attractive to stave off an influx of unproductive foreign funds.
The Brazilian government deliberately curbed growth last year out of fear that its economy might
overheat, leaving Brazil trailing the rest of the BRIC countries with a growth rate of just 3 percent.
Now, though, the president is trying to fire up her country's boom once again.
Brazil proves Dutch disease is avoidable- uses Norway’s solution
Follath & Gluesing, Spiegel columnists, 12
[Erich and Jens, 8-10-12, Spiegel, “From Poverty to Power: How Good Governance Made Brazil a Model
Nation,” http://www.spiegel.de/international/world/good-governance-series-how-brazil-became-a-modelnation-a-843591.html, accessed 7-13-13, MSG]
Oil, the same resource that proves more of a curse than a blessing for so many countries and often leads
to "bad governance" -- to inequality, corruption and bloodshed -- may play a decisive role in setting
Brazil's future course.
Brazil is a nation with many natural resources. The country has enormous rain forests, which are
being illegally clear-cut by mafia groups not even Rousseff's administration has yet managed to
control. Brazil also possesses more than half of South America's fertile farmland, as well as
hydropower and minerals in abundance -- and large amounts of natural gas and crude oil. Just six
years ago, additional oil deposits were found off the coast of southern Brazil, hidden deep beneath the
water 300 kilometers (190 miles) offshore from Rio de Janeiro. These deposits are a challenge to
access, but they have the potential to be enormously lucrative.
Brazilian oil company Petrobras, in which the government owns a majority share, holds the
monopoly on extracting that oil. With revenue over $120 billion, Petrobras is one of the world's
largest companies -- and its best days are still ahead. Currently, Brazil exports only about 800,000
barrels of oil, barely a tenth what Saudi Arabia exports.
Petrobras' research center looks like something built by extraterrestrials with environmental leanings. The
building's white domes and glass hallways, which insulate from both heat and noise, are built to the latest
environmental standards and use almost exclusively solar and wind power. "Fossil fuels are too valuable
for something like this," says lead engineer José Fagundes Netto from the company's observation deck at
the university campus on the outskirts of Rio.
Petrobras plans to put $225 billion -- "the world's biggest investment" -- into its offshore oil fields
by 2015. Some of the deposits are located at depths of more than 5,000 meters (16,000 feet), with the last
2,000 meters (6,500 feet) to the coveted resource consisting of a salt crust. The technical challenges are
enormous, but Petrobras' engineers believe they can overcome them. "We're at the forefront globally
when it comes to deep-sea drilling," Netto declares confidently. Yet Brazil, too, struggled with a deep-sea
leak this January, temporarily halting operations at Carioca, its fifth largest oil field.
Petrobras plans to be extracting from all its deep-sea locations by 2017. A few years after that, if all
goes well and no accidents occur, the Brazilian corporation could be No. 1 globally in terms of stock
market value and production. A new refinery is currently being built, while others are planned.
That will make it possible to export not only raw materials, but refined products as well. This act of
farsightedness distinguishes Brazil from oil-rich countries, such as Iran, Iraq or Venezuela, that have
been extracting oil for decades, yet sometimes end up having to import gasoline and diesel.
Avoiding the 'Dutch Disease'
Just how important Petrobras is to the country's president can be seen in Rousseff's choice for the
company's new CEO: Maria das Graças Foster, 58, who is both a widely recognized energy expert,
and yet another one of Brazil's breathtaking success stories. Foster comes from Rio's favelas and worked
her way through college, raising a daughter at the same time. With hard work, in the space of 30 years she
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climbed the career ladder from intern, to oil platform technician, to overseeing the company's natural gas
division.
In addition to being an expert on fossil fuels and company management, Foster knows a great deal about
soccer and is a fan of Botafogo, a team in Brazil's top league. But she has no patience for employees who
lag behind. When that happens, just like her friend the president, Foster can become quite unpleasant.
One major challenge for Brazil is how to avoid the "Dutch disease" -- an economic term that refers
to a decrease in the competitiveness of a country's manufacturing sector as its exploitation of
natural resources increases. It also wants to prevent the cronyism that tends to plague oil-extracting
nations and, instead, ensure that the people get a fair share of the profit obtained from the country's
natural resources.
So far, Norway has provided the best solution to this problem, through a sovereign wealth fund that
funnels a portion of the country's oil profits into investments. Petrobras holds up Norway's example
as its stated ideal. Still, balancing the specifications of the government, which holds a majority share in
Petrobras, with the interests of the minority shareholders is likely to prove considerably more difficult in
the newly industrialized country of Brazil than it is in a well-established Scandinavian democracy.
Brazil proves Dutch disease is avoidable
Carrington, the Guardian, 10
[Damian, 8-5-10, the Guardian, “Can Brazil become the world's first environmental superpower?,”
http://www.guardian.co.uk/environment/2010/aug/05/brazil-environmental-superpower, accessed 7-1313, MSG]
Câmara has adopted the slogan: "Brazil – the natural knowledge economy". He describes this as
applying knowledge and technology to commodities to boost their value, and reels off examples:
biofuels, in which Brazil leads world research thanks to its sugar cane ethanol and growing biodiesel
production; renewable energy – 47% of the country's energy is already green, a world record; and
climate change – Brazil's Amazon is vital to the planet's health. Of course, it also has plenty of timber,
beef, iron and aluminium, though he doesn't boast about those.
"Brazil's natural knowledge economy offers more opportunities for internal [national] research than
our manufacturing industry," he says. "There is no opportunity in, say cars, as VW designs those in
Germany." Câmara also suggests the approach will allow Brazil to avoid the "resources curse",
reeling off Venezuela, Angola, Saudi Arabia and Sierra Leone as examples. Brazil wouldn't be the
first nation to get rich on its resources, but it aims to be the first to do without destroying its own
economy or environment.
The effects of Dutch disease are easily manageable
Osava, Inter Press Service correspondent, 8
[Mario, 11-4-8, Inter Press Service, “ECONOMY-BRAZIL: Crisis Delays Threat of ‘Venezuelan
Disease’,” http://www.ipsnews.net/2008/11/economy-brazil-crisis-delays-threat-of-venezuelan-disease/,
accessed 7-13-13, MSG]
The consequent overvaluation of the real, the national currency, may be “deindustrialising” Brazil,
by reducing the competitiveness of the industrial sector, forcing it increasingly to import components and
transforming it into a “maquiladora” – a term for companies in duty free zones that import components on
preferential terms and assemble products for export, using cheap labour, without adding value or
technology.
This was the apparent trend, but a serious situation of “Dutch disease” will only come about towards
the end of this decade if the exchange rate is maintained at the level it stood at three months ago, at
just over 1.50 reals to the dollar, Julio Gomes de Almeida, a professor at the University of Campinas
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and a consultant for the Institute of Industrial Development Studies (IEDI, founded by industrialists in
1989), told IPS.
From 2006 until the first half of this year, “the expanding internal market reduced the impact of
the appreciated exchange rate” on the manufacturing sector, he said.
Appreciation of the national currency is “the mechanism through which the disease is transmitted,”
but strong growth in domestic consumption “to a large extent compensated” for the overvalued
real, he said.
The real stood at around three to the dollar in 2003, but the exchange rate fell to 1.56 reals per dollar in
early August this year. If this exchange rate continues, it will cause “severe damage” to industry,
according to the economist.
But capital flight, triggered by the international financial crisis that originated in the United States, has
led to a sharp depreciation of the real since September. Two weeks ago the real stood at 2.30 to the
dollar in Brazil, reaching a value of 2.52 on Oct. 23.
The Central Bank intervened, selling dollars after being authorised to use up to 50 billion dollars of
the country’s foreign reserves, which totalled 207 billion dollars in early October.
This had the effect of strengthening the real to nearly 2.10 to the dollar, thanks also to the anticrisis measures taken in the United States and Europe.
Brazil has had one of the most volatile exchange rates in the world in the past three months, if not the
most volatile, with sharp rises and falls in the value of the real within the space of a single day.
These are “devastating blows” that damage business and cause losses at a moment’s notice, since “all the
big companies have debts in dollars,” and the benefits of the devaluation of the real for exporters “will
only be felt in the long term,” Almeida said.
Many Brazilian companies have speculated on future exchange rates, wagering on a continued
overvaluation of the real. This could cause huge losses and aggravate the impact of the crisis in Brazil.
In any event, Almeida said the crisis brought about a “correction” in monetary policy, which seemed
“to actually be wishing for Dutch disease” by allowing speculative capital to enter and exit the
country freely, something that is not permitted in other emerging economies. When the present
turmoil has been overcome, some restrictions, however temporary, will have to be imposed, he said.
Now “a new international and national economy has been born,” and the excessive overvaluation of the
real has been left behind, although it remains to be seen what the exchange rate will be when the crisis is
over, the economist said.
His concern now, he added, is that at some future time, which the financial crisis has possibly delayed for
several more years, Brazil might become a major oil power, exporting the large reserves that were
discovered this year thousands of metres below the surface of the Atlantic ocean, under a salt layer, some
250 kilometres off its southeastern coast.
The creation of a fund similar to Norway’s is being discussed, to convert oil riches into benefits for
the entire population, especially future generations, by investing in education and so avoiding “the
curse of oil” and “Dutch disease”.
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Avoidable – Mongolia Proves
The “resource curse” is avoidable- Mongolia proves
Samuelsson, Global Trends, 13
[Malin, 3-5-13, Global Trends, “THE RESOURCE CURSE AND DEVELOPMENT - MONGOLIA
REVISITED,” http://www.globaltrends.com/blog/entry/the-resource-curse-and-development-mongoliarevisited, accessed 7-13-13, MSG]
So is Mongolia more capable than, say, Nigeria, Sierra Leone and Venezuela to avert the resource
curse in the long term? Well, there are indeed a few positive characteristics that set Mongolia apart
from other resource-rich developing countries. First and foremost, it’s a democracy. Even if ever so
immature, small, nomadic, and landlocked, it constitutes a sliver of hope for good governance wedged
between giants with questionable democratic credentials. Its democratic potential has therefore
spurred foreign donors on, in the hope that ‘here’s a place that we can actually change’ – there’s
both the manpower and the institutions and, more recently, also the resources to do so. Secondly,
because of its Soviet era heritage, the country has a bureaucratic and human resources ‘skeleton’ to
build upon: institutions are in place, the literacy and education levels are high compared to other
resource-cursed countries, and the educated elite have a lot of exposure to the outside world
through having worked and studied abroad. Thirdly, civil society is on the rise and people speak up
more now than 10 years ago and are less likely to tolerate corrupt practices. Finally, the Mongolian
Independent Authority Against Corruption (IAAC) is reportedly working at full speed. It has a track
record of high-level convictions, including former president N. Enkhbayar. Despite his reputation for
corruption, some sources claim his arrest was politically motivated, particularly because of the timing; he
was detained just a few weeks before a general election where he was set to regain power with his
reformed socialist party.
The numbers too are rosy: Mongolia is predicted, by The Economist, to be the world’s fastest
growing economy in 2013 at a whopping 18.1 percent. The GDP per capita is around US$ 5,000,
placing it roughly on par with Bolivia, Honduras and Indonesia. All this, and now Kentucky Fried
Chicken is set to enter Mongolia’s culinary arena with four flagship outlets this summer! (Is
McMutton next?)
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Mexico Answers
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No Mexican Dutch Disease
Dutch Disease would not affect Mexico – only affects countries that rely
disproportionally on oil
Plumer, Washington Post reporter, 13
[Brad, 3-19-13, Washington Post, “U.S. oil production is booming. Is “Dutch disease” on the way?,”
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/03/19/u-s-oil-production-is-booming-heresthe-catch/, accessed 7-12-13, MSG]
Now, the big question is whether this is a concern or not. In a recent VoxEU essay, three World Bank
economists argued that Dutch disease does appear to hurt poorer countries that rely
disproportionately on oil or other natural resources — say, Venezuela or Angola. But for wealthier
countries with healthy political institutions, the effects of Dutch disease are far less pronounced. Oil
isn’t always an economic curse.
It’s worth noting that Canada is having this exact discussion right now. As Alberta’s oil sector has
grown and thrived in recent years, the value of the Canadian dollar has risen. At the same time, Canada’s
auto manufacturers have become less competitive. Critics have often chalked this up to the dread Dutch
disease.
But not everyone’s convinced this is a big problem. “The symptoms we are seeing are not those of
Dutch Disease but rather of structural changes in the global economy to which Canada must
adjust,” said former Bank of Canada governor Mark Carney in a big speech last September. He argued
that Canada’s oil wealth was, on net, a good thing for the country’s economy and even offered some
recommendations for policymakers to grapple with the shifts in the country’s economy. (Among
other things, he warned the central bank not to intervene in the shifting exchange rates.)
Dutch Disease would not happen in Mexico – only applies to developing countries or
countries that have never produced industrial goods- can easily be neutralized
Bresser-Pereira, Getulio Vargas Foundation economics professor, 8
[Luiz Carlos, January 2008, Revista de Economia Política, “The Dutch Disease and Its Neutralization: A
Ricardian
Approach,” http://www.networkideas.org/featart/jan2010/dutch_disease.pdf, p. 26-28, MSG]
Dutch disease is the fundamental component of the tendency to exchange rate ¶ overvaluation that
characterizes developing countries. I believe that the best way to ¶ conclude this paper in which I have
tried to (a) define it as clearly and precisely as ¶ possible, (b) present the concept of extended Dutch
disease, which does not result from ¶ natural resources but from cheap labor, (c) show that it is a serious
market failure, and (d) ¶ discuss how it can be neutralized, is to summarize it in a few items. Briefly:
1. Dutch disease occurs when there is a relatively permanent overvaluation of the ¶ exchange rate resulting
from the country's abundant natural resources (restricted ¶ concept) or cheap labor (extended concept),
whose low marginal cost is consistent ¶ with a market exchange rate substantially more appreciated than
the industrial ¶ equilibrium exchange rate.
2. there are two equilibrium exchange rates: the current equilibrium exchange rate, ¶ that balances
intertemporally the country's current account, and is, therefore, the ¶ rate the market tends to determine,
and the industrial equilibrium exchange rate, ¶ that enables industrial sectors using state-of-the-art
technology; the Dutch disease ¶ occurs when those two equilibriums present conflicting values;
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3. the symptoms of Dutch disease in a country are permanent when the country has ¶ never
produced industrial goods, or they result from some new fact that led the ¶ already industrialized
country to stop neutralizing the disease or, still, from a ¶ change in the terms of exchange that
increases commodities' market price; in the two latter cases, there will be an appreciation of the
exchange rate without a ¶ reduction in the country's trade surplus; there will be de-industrialization; and
the ¶ industrial good-exporting companies will be increasing the imported component in ¶ their production
in order to gradually transform the country's manufacturing ¶ industry into a ‘maquila’ industry [in-bond
industry];
4. the neutralization of the Dutch disease should be made through a tax on domestic ¶ sales and on
commodity exports that will be different for each commodity, in order ¶ to be proportional to the
difference between the current equilibrium exchange rate ¶ and the industrial equilibrium exchange rate
that is necessary for industrial ¶ companies using state-of-the-art technology to be competitive;
5. the more serious the Dutch disease is in a country, the more difficult will be its ¶ neutralization, and the
lower the probability for this country to industrialize and ¶ grow;
6. the resources from the tax created to neutralize the Dutch disease should not be ¶ invested in the country
(unless they are used in order to stabilize the prices of ¶ commodities on which it will be imposed) but
invested in an international financial ¶ fund so that the inflow of resources does not entail the revaluation
of the local ¶ currency;
7. despite the fact that the tax should only be imposed on the marginal revenue ¶ obtained by the producers
resulting from the depreciation assured by the tax, it is ¶ not easy to neutralize the Dutch disease in view of
the resistance to taxation by ¶ exporters of commodities; on the other hand, depreciation finds resistance in
the ¶ whole population because it causes temporary inflation, and especially because it ¶ reduces real
wages;
8. although developing countries have always had Dutch disease but did not know, ¶ many
industrialized; the reason is that, in practice, they have neutralized the Dutch ¶ disease through the
use of multiple exchange rates, and of import duties and export ¶ subsidies that implied a disguised
tax on commodities; they justified these policies ¶ with the theories of the infant industry and the
deterioration of the terms of trade; ¶ however, there is no protectionism when duties merely
compensate for the ¶ appreciation caused by the Dutch disease;
9. Dutch disease is a serious market failure because its non neutralized existence ¶ implies negative
externalities derived from cheap resources;
10. Dutch disease exists even if the commodities that give rise to it have high ¶ technological content, as is
currently the case of oil production, and of an ¶ increasingly technologically sophisticated agriculture; it is
an obstacle to growth ¶ because because mining and agricultural activities are not able to employ all the ¶
labor force, and because it implies that the country renounces its opportunities to ¶ invest and to innovate
in sectors potentially with still higher technological content ¶ and, therefore, with higher value-added per
capita;
11. Dutch disease may also derive simply from cheap labor; in this extended concept ¶ of Dutch
disease, the condition for it to occur is that the wage spread in the ¶ developing country is substantially
larger than in rich countries to where the goods ¶ would be exported;
Mexico is not susceptible to Dutch disease – massive reforms process
The Economist, 12
[11-22-12, The Economist, “Looking back on the Calderón years,”
http://www.economist.com/blogs/americasview/2012/11/felipe-calder%C3%B3n-his-presidency-mexico,
accessed 7-13-13, MSG]
The Economist: It seems that in the past few years there has been a lot of interest in the Brazilian
economy, and that now interest is turning to the Mexican economy. Why are we seeing this change?
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Calderón: I’m grateful that there is this interest in Mexico. It seems that for a long time the Brazilian
economy benefited greatly from the increase in the price of commodities, and particularly from the
increase in its exports to China. Now that there has been real instability in the price of commodities, many
prices have fallen, and the level of exports to China has declined, or China’s economy is growing at a
slower rate, this is impacting Brazil.
When we look at Mexico these past years, we implemented a very intense reform process aimed at
improving our competitiveness. What did we do?...A big programme of deregulation, in which we
eliminated about 16,000 rules or regulations at the federal level, which meant eliminating more than 2,000
bureaucratic procedures. Secondly we gave a notable boost, probably without precedent, to
infrastructure, constructing or refurbishing 20,000km of highways. Third, we invested a lot in human
capital: 140 new universities were founded, and the campuses of at least 100 more were increased. With
that, 113,000 engineers are graduating every year, which gives us greater competitiveness,
particularly in terms of manufacturing.
Fourth, we reduced tariffs. The average tariff on manufacturing supplies reduced from 12% to 4%,
which converted Mexico into a very competitive country, particularly in manufacturing and
industry. One example is that when I entered the presidency, Mexico was the ninth-biggest exporter of
automobiles in the world, and now it is the fourth-biggest, ahead of the United States. And at a time
when the aggregate value of the global economy is becoming more focused on manufacturing and
less on commodities, that has benefited Mexico.
Mexico became more competitive and Brazil is encountering problems with competitiveness,
basically through the appreciation of the real, which in truth is not a phenomenon to blame on the
Brazilians, but rather what is called “Dutch disease”—a massive entry of foreign capital that causes their
currency to appreciate. There have also been cases of monetary policy that can complicate things.
Interest rates in Mexico, for example, have stayed at around 4%. The rates paid by the central bank
of Brazil were at levels of 13% or 14% for a long time, so that provoked a massive inflow of money,
the real appreciated and the [stronger] real made Brazil lose a lot of competitiveness in terms of
manufacturing.
The Economist: Some people think that Mexico could grow at 6% a year. How? And what are the risks to
the Mexican economy?
Calderón: Mexico could grow at rates of 6% or more if it did various things. If it continues with a
process of deregulation and opening to competition, particularly in the telecommunications sector.
Secondly, if it opened up to competition in the field of energy. And third, if it sorts out our problem
of the rule of law, which as we have said is a very important challenge for Mexico. These three things
would give Mexico the potential to grow permanently, or at least for many years, above 6%.
Mexico’s manufacturing is diversified –no impact to Dutch disease
Young, The Main Wire, 11
[James, 11-10-11, The Main Wire, “Mexico Links to China Tied to Competitiveness Not Commodities,”
https://mninews.marketnews.com/index.php/mexico-links-china-tied-competitiveness-notcommodities?q=content/mexico-links-china-tied-competitiveness-not-commodities, accessed 7-13-13,
MSG]
Only 0.5% of all Mexican exports last year were destined for China, and only one of Mexico's top five
exports to China is a commodity, according to a June 2011 report issued Economic Commission for Latin
America and the Caribbean.
Mexico's trade deficit with China stands in stark relief to Peru, Brazil or Chile, where massive
commodity exports have resulted in nearly balanced trade, or even a surplus in the case of Chile.
But only 20% of Mexico's exports from January to September this year consisted of commodities. Oil
exports account for 16% of exports, and in 2010, the United States consumed about 81% of that oil.
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And unlike in other countries in the region where energy investments are booming, Mexico's
government has used oil revenues to finance the goverment and made only token efforts to open the
state-controlled industry to much-needed private investment. (See MNI's LatamEnergy series Oct. 2528.)
Brazil's Braskem, for example, has enjoyed significant trade in oil with China since it was formed in
2002, making the most of this commodity-hungry phase in China's emergence as a major world economy.
Nevertheless, Mexico is showing signs of new vitality.
Already, one of Mexico's top exports to Asia are electronic components, and larger items like cars
and airplanes are developed atop a broad base of manufacturers of small components.
Despite the recent downturn in the U.S. and European economies, Mexico's trade balance was positive
for six consecutive months from January to June 2011, the first time since 1997. It reached $1.46
billion in March, the highest monthly level for as far back as the government database reaches: 1993.
According to the ECLAC study, from 2007 to 2009, Mexico's top five exports consisted of electronic
micro assemblies, which comprised 14.0% of the country's exports to China; copper concentrate, 10.0%;
telecommunication equipment, 4.7%; semiconductor devices, 4.2%; and office machine parts, 4.0%.
The breakdown is indicative of Mexico's diverse manufacturing industry. While volumes remain
small, Mexico exports 1,143 different classes of goods at the six-digit level. This is nearly as many as
Brazil exports to China, at 1,186.
"Mexico has been having some success in moving up the value-added chain, while many of the
countries further south are grappling with Dutch Disease on the back of bumper demand from
Asia," said David Rees, an emerging market economist with Capital Economics. "So while they are
receiving short-term benefits, they could be to the detriment of medium-term development."
Rees said Mexico has been somewhat successful in replacing the loss in agricultural production with
electronics and auto manufacturing.
"Overall that is a positive development. The problem is finding demand for those goods," he said.
"Setting up new export markets takes time and almost every other economy country in the world is trying
to replace waning U.S. demand."
The rebirth of the manufacturing sector is a reversal of a decade-long trend.
No link – Mexico avoids resource curse – governance policies
Craig, Voice of America News, 5-16-13
[Jill, Voice of America News, “South Sudan 'Failing' at Resource Management”, Lexis, accessed 7-10-13]
WASHINGTON - A new report says one billion people could have their lives transformed with
better governance and management of their countries' natural resources.
The study by Revenue Watch, which was released Wednesday in Washington, D.C., says that less than
20 percent of the 58 countries studied "embraced openness and accountability." These 58 countries
produce 85 percent of the world's petroleum, 90 percent of the world's diamonds, and 80 percent of the
world's copper, according to Revenue Watch.
Revenue Watch is a New York based non-profit that, according to its website, works to reduce
corruption and improve governance in resource rich countries.
The 58 countries in the study were evaluated on four factors - institutional and legal setting, reporting
practices, safeguards and quality controls, and general governance environment.
Revenue Watch says that most of the worst performers depend almost exclusively upon revenues from
natural resources as their main source of income. South Sudan, the most oil dependent country in the
world, received a failing grade, ranking 50th out of the 58 countries.
Revenue Watch analyst Marie Lintzer, an analyst with Research Watch, worked on the project.
"They don't have an open and transparent oil sector," she said. "By that, we mean that they do not publish
a lot of information about the oil revenues that they get, and their checks and balances are weak."
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"And actually the only part where South Sudan scores really high on our index is regarding the
institutional arrangements," she continued. "They have laws in place and since 2011, they have issued
some laws regarding transparency in the oil sector. And South Sudan has a very high score in that
respect."
But, Lintzer added that while South Sudan may have laws on the books, such as the 2012 Petroleum Act,
implementation of the laws is a problem.
"For now, none of the government agencies have been publishing information, so you can't really find
anything," she said. "Whether it's reports that have been published by ministries, or online, that was the
main difficulty. Because you don't have any information on the sector."
South Sudan's dependence on its oil sector makes better governance a priority, according to Lintzer.
"Their entire economy is based on oil. And therefore, managing well your oil sector and having an
accountable and transparent oil sector is important for the economic development of that country and for
the sustainability of the economic growth that would go with that."
Revenue Watch President Daniel Kaufmann agreed, saying the issue is not only important for South
Sudan, but also for other countries ranking poorly on the index.
"But in terms of a development challenge of this decade, for these countries, it is the management, the
better governance, anti-corruption in natural resources," he said. "Because that is basically where
their domestic resources lie."
However, the Revenue Watch report states that being wealthy is not a precondition for good
governance of resources. The report said six of the top 11 performers on the index are middleincome countries, including Mexico, Colombia, and Peru.
"The silver lining is that some are performing satisfactorily, and that shows that it can be done,
that there's no such thing as a deterministic resource curse," Kaufmann explained. Those countries
that are doing satisfactorily are not all rich industrialized countries. And that's very interesting
news from this data report."
Revenue Watch said the future of sub-Saharan African countries will depend on how well they manage
their oil, gas, and mineral resources.
No link to Mexico – and extraction management solves
Biron, Inter Press Service, 13
[Carey L., 5-16-13, Inter Press Service, “U.S.: RESOURCE MANAGEMENT CENTRAL TO
EQUITABLE DEVELOPMENT”, Lexis, accessed 7-10-13]
Trillions of dollars a year are being produced through extractive industries, but just a tiny percentage of
this money is impacting on the lives of poor communities in developing countries, according to a first-ofits-kind study released Wednesday.
The revenues being produced by exploiting natural resources in developing countries already massively
outweigh development-focused foreign aid flows. But according to new research from the Revenue
Watch Institute, a global watchdog group, there is a startling correlation between economic dependency
on natural resources and low human development indicators.
"The 58 countries [studied] produce 85 percent of the world's petroleum, 90 percent of diamonds and 80
percent of copper. Profits from their extractive sector totaled more than $2.6 trillion in 2010," according
to Revenue Watch's new Resource Governance Index, unveiled here Wednesday.
"Revenues from natural resources dwarf international aid: In 2011, oil revenues for Nigeria alone
were 60 percent higher than total international aid to all of sub-Saharan Africa. The future of these
countries depends on how well they manage their oil, gas and minerals."
Of those 58 countries, more than 80 percent have reportedly failed to put in place satisfactory standards
for openness in these sectors - and half haven't even taken basic steps in this regard.
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Revenue Watch analysts say the findings constitute a "striking governance deficit". While such problems
have been widely known on an anecdotal basis, this is the first time these issues have been systematically
disaggregated and compared.
"The index is a real wake-up call about how far we still have to go in managing public resources
effectively and for the betterment of poor populations around the world," Warren Krafchik, director of the
International Budget Partnership, a Washington-based project that works to strengthen civil society
involvement in public budgeting, told IPS.
"Particularly now after the global financial crisis, this data shines a big spotlight on how, while resources
can still be transferred from the Global North to the South, the fact is that the South is sitting on really
substantial resources of its own. The challenge is how to use those effectively."
The new data highlight a real opportunity to do something "fundamental" about global poverty, Krafchik
notes.
"It's really not the amount of public resources that's available that's the primary obstacle to overcoming
extreme poverty," he says. "The issue is how those resources are managed and distributed."
Similarly, several analysts are suggesting the data could influence discussion on the new international
development agenda following the expiration of the Millennium Development Goals (MDGs) in 2015.
"We're talking about real money here - foreign aid can be used as leverage, but the domestic resources
issue is absolutely key," Daniel Kaufmann, president of the Revenue Watch Institute, told a Washington
audience Wednesday.
"Clearly, 2.6 trillion dollars has major transformative potential in terms of translating these natural
resources riches into human capital. Further, oil-rich states are three times less likely to democratise than
are the non-oil-rich, so this matters from a political standpoint, too. This is the development challenge of
the decade."
No resource curse
In terms of extractives governance, particular problems appear to be concentrated in northern and
southern Africa and the Middle East. Latin America, on the other hand, is seen as generally doing
better, with Brazil, Mexico, Chile, Colombia and Trinidad & Tobago all ranked in the top 10.
The index is topped by developed countries, with Norway, the United States (though only regarding
its extractives work in the Gulf of Mexico) and the United Kingdom the only countries rated
satisfactory on all indicators. Australia and Canada (though only its sector in Alberta) are also in the top
10.
However, the governance findings are more complex, and more interesting, than a simple breakdown of
poor versus rich countries. Kaufman says the data rejects "the tired notion of the deterministic 'resource
curse'".
"The silver lining here is that there's variation - a number of countries have satisfactory performance, and
those are in diverse contexts, including in emerging economies," he notes.
"Among those that perform poorly are some very rich countries, particularly in the Gulf. Just being rich
isn't necessarily an indication that a country is performing well, and being a developing country isn't a
rationale for doing poorly."
While many are suggesting that the new index will provide an important tool for identifying country-level
problems, debate remains over how to rectify these issues. While political will in affected countries will
clearly be a paramount factor, potential roles for the international community are less clear.
According to numbers offered at a panel discussion here on Wednesday, foreign assistance won't
necessarily offer significant leverage towards greater compliance.
"Of the 46 countries with below satisfactory levels on this index, just six have external assistance levels
greater than five percent of gross domestic product, and only three are higher than 15 percent," George
Ingram, a senior fellow at the Brooking Institution, a think tank here, said, suggesting this route of
influence is a "dead end".
"However, that money can be used to enhance the performance of government capability a For
instance, on taxation, there is a new movement of acknowledging that we need to help developing
countries develop their capacity to develop their own revenues."
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Over the past decade, international discussion on natural resources governance has coalesced around
a set of standards known as the Extractive Industries Transparency Initiative (EITI). According to
the EITI website, 21 countries are currently considered compliant with the initiative, while another 16 are
pending candidates.
Yet EITI is still codifying its standards, and several EITI-compliant countries fared poorly on the new
Governance Index. Advocates are particularly calling for the inclusion of contracts in the EITI
transparency requirements, and several such major reforms will be discussed next week at an EITI board
meeting in Australia.
Revenue Watch and others say the most potent role in ensuring government accountability in this regard
will fall to national-level civil society.
"Control over resources traditionally meant power, and the incentives for politicians to give that up are
really low," Carlos Pascual, a U.S. State Department official, said Wednesday.
"You have to create different incentive structures, and changing that equation will have to strengthen the
role of civil society and the political processes by which pressures can be brought on politicians to link
their ability to stay in government with how they manage the resource base. We're at the very beginning
right now on thinking about what the best models may be a but at least we're starting to have that
discussion."
No Mexican resource curse – successful poverty alleviation
Mills, Manaar Energy consulting director, 13
[Robin, 3-11-13, The National, “Venezuela pays high price for oil politics of Chavismo era.”, Lexis,
accessed 7-10-13]
Recycling a unique flood of petrodollars achieved genuine reductions in poverty and improvements
in health and education. But many of these gains were exorbitantly expensive. ¬ Brazil´s adult
literacy programme cost $2.50 per learner - Venezuela´s, almost $1,000, and it is not even clear that
it improved literacy at all. Inflation, imports, shortages, crime rates and corruption soared; a new
class of »boligarchs« made fortunes from insider connections and overvalued exchange rates. ¬
Policymakers have gained a lot of experience over the past few years about how to avoid the
»resource curse«. ¬ Brazil and Mexico have run successful poverty alleviation programmes but
Venezuela failed to learn these lessons. ¬ The economic consequences of Chávez were strikingly
similar to those of his great friend and fellow oil-fuelled authoritarian, Iran´s Mahmoud
Ahmadinejad. ¬ Perhaps the saddest thing about his policies is that they were neither sustainable
nor new. Much of »Chavismo« was a re-hashing of failed Latin American populist and import
substitution policies, dressed up with opposition to »neo-liberal« institutions, globalisation and the
United States. Yet the US continues to be by far Venezuela´s biggest oil customer. And Chávez´s
ideological soulmates around the world gave him a surprisingly easy ride on Venezuela´s poor
environmental record - obstructionism on climate change abroad, the world´s cheapest petrol at home. ¬
He largely dismantled the institutions of Venezuelan democracy, and stained his record by embracing
tyrants such as Libya´s Muammar Qaddafi and Syria´s Bashar Al Assad. ¬ Chávez´s successor will have
to balance economic stability, rebuilding the petroleum industry and meeting the genuine aspirations of
the poor. The next president´s decisions will have major consequences for Venezuelans - and world oil
markets.
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Venezuela Answers
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Dutch Disease Now
No uniqueness – Venezuela has already succumbed to resource curse
Mills, Manaar Energy consulting director, 13
[Robin, 3-11-13, The National, “Venezuela pays high price for oil politics of Chavismo era.”, Lexis,
accessed 7-10-13]
Recycling a unique flood of petrodollars achieved genuine reductions in poverty and improvements
in health and education. But many of these gains were exorbitantly expensive. ¬ Brazil´s adult
literacy programme cost $2.50 per learner - Venezuela´s, almost $1,000, and it is not even clear that
it improved literacy at all. Inflation, imports, shortages, crime rates and corruption soared; a new
class of »boligarchs« made fortunes from insider connections and overvalued exchange rates. ¬
Policymakers have gained a lot of experience over the past few years about how to avoid the
»resource curse«. ¬ Brazil and Mexico have run successful poverty alleviation programmes but
Venezuela failed to learn these lessons. ¬ The economic consequences of Chávez were strikingly
similar to those of his great friend and fellow oil-fuelled authoritarian, Iran´s Mahmoud
Ahmadinejad. ¬ Perhaps the saddest thing about his policies is that they were neither sustainable
nor new. Much of »Chavismo« was a re-hashing of failed Latin American populist and import
substitution policies, dressed up with opposition to »neo-liberal« institutions, globalisation and the
United States. Yet the US continues to be by far Venezuela´s biggest oil customer. And Chávez´s
ideological soulmates around the world gave him a surprisingly easy ride on Venezuela´s poor
environmental record - obstructionism on climate change abroad, the world´s cheapest petrol at home. ¬
He largely dismantled the institutions of Venezuelan democracy, and stained his record by embracing
tyrants such as Libya´s Muammar Qaddafi and Syria´s Bashar Al Assad. ¬ Chávez´s successor will have
to balance economic stability, rebuilding the petroleum industry and meeting the genuine aspirations of
the poor. The next president´s decisions will have major consequences for Venezuelans - and world oil
markets.
Non-unique – Massive resource curse now – mismanagement of oil wealth
Romero, New York Times Brazil Bureau Chief, 9
(Simon, 11-13-09, The International Herald Tribune, “Chronic shortages plague energy-rich Venezuela;
No quick fixes in sight as quixotic state policies create inefficiencies”, Lexis, accessed 7/13/13, QDKM)
Venezuela may be an energy colossus, with the largest conventional oil reserves outside the Middle East
and one of the world's mightiest hydroelectric systems. But that has not prevented it from enduring
serious electricity and water shortages that seem to be getting worse.
President Hugo Chávez has been facing a public outcry in recent weeks over power failures that, after six
nationwide blackouts in the past two years, are cutting electricity for hours each day in rural areas and in
industrial cities like Valencia and Ciudad Guayana. Now, water rationing has been introduced in Caracas,
the capital.
The deterioration of services is perplexing to many here, especially because the country had grown
used to inexpensive, plentiful electricity and water in recent decades. But even as the oil boom was
enriching his government and Mr. Chávez asserted greater control over utilities and other
industries in this decade, public services seemed only to decay, adding to residents' frustrations.
With oil revenue declining and the economy slowing, the shortages may have no quick fixes in sight.
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The government announced some emergency measures this week, including limits on imports of airconditioning systems, rate increases for consumers of large amounts of power and the building of new
natural gas-fired power plants, which would not be completed until the middle of the next decade.
Skepticism also persists over another plan - to develop a nuclear energy program - because it would
require billions of dollars and extensive training of Venezuelan scientists at a time of budget shortfalls
and falling oil production.
Potential diplomatic resistance to Venezuela's cooperation on nuclear matters with Iran could slow these
ambitions further.
''We're paying for the mistakes of this president and his incompetent managers,'' said Aixa López, 39,
president of the Committee of Blackout Victims, which has organized protests in several Venezuelan
cities. In some cities, protesters have left household appliances on the steps of state electricity companies.
In response, Mr. Chávez is embarking on his own crusade: pushing Venezuelans to conserve by mocking
their consumption habits.
He began his critique last month with the amount of time citizens spend under their shower heads, saying
three-minute showers were sufficient. ''I've counted and I don't end up stinking,'' he said. ''I guarantee it.''
Then he went after Venezuela's ubiquitous love motels and shopping malls, accusing them of waste. ''Buy
your own generator,'' he threatened, ''or I'll cut off your lights.''
He also laid blame on ''oligarchs,'' a frequently used insult here for the rich, for overconsumption of water
in gardens and swimming pools.
Mr. Chávez is even going after his countrymen's expanding waistlines.
''Watch out for the fat people,'' he said last month, citing a study finding a jump in obesity. ''Time to lose
weight through dieting and exercise.''
While Mr. Chávez zeroes in on such issues, Venezuela's declining public services offer what may be a
view into the ''resource curse'': the idea that some countries with abundant natural resources have
societies hampered by political discord, stunted growth and glaring inefficiencies.
On paper, at least, Venezuela should be swimming in surplus power.
The country has huge reserves of oil and natural gas and sizable coal deposits. Its Guri dam complex,
built with postwar oil riches in the 1960s, is one of the world's largest hydroelectric projects.
Guri provides Venezuela with as much as three-quarters of its electricity and, just as crucial, allows
Venezuela to export about 500,000 barrels of oil a day that might otherwise be needed to meet electricity
demand.
But energy economists here said a combination of negligence and poor planning pushed Guri to its limit
in this decade, while other electricity projects, including several built in recent years to be fueled by
natural gas, remain completely or partly idle.
Mr. Chávez's government blames relatively low rainfall this year for low water levels at Guri and for
declining water supplies for Caracas. But former government officials interviewed here said the problems
were more daunting than a lack of rain.
They said the president encouraged consumption with a 2002 decree freezing electricity and other utility
rates. A time-zone change put into effect by Mr. Chávez in 2007 that turned clocks back half an hour also
increased consumption, since the sun now sets earlier here than before.
Meanwhile, nationalization effectively halted renewable-energy projects, like a plan by AES Corp., which
used to control the main electricity company in Caracas, for a wind farm on the Paraguana peninsula.
Despite Venezuela's large wind and solar potential, renewable energy here remains negligible.
Most significant may be the government's failure to use Venezuela's immense natural gas reserves, the
largest in the Western Hemisphere after those of the United States, to fuel existing power plants.
Venezuela's natural gas is technically hard to extract because almost 90 percent of it is associated with oil,
but major projects have languished even as Venezuela's neighbor, Trinidad, taps adjacent gas reserves
with ease. Venezuela relies on Colombia, with which ties are increasingly tense, for gas imports.
As a result, there is a disconnect between Venezuela's energy potential and its ability to keep the
lights on. Billboards here extol a ''natural gas revolution'' and the prowess demonstrated by a satellite put
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into orbit last year with China's assistance, while daily blackouts plague poor areas where the satellite was
supposed to help provide phone and Internet services.
''The problem isn't a lack of money,'' said Victor Poleo, a former Energy Ministry official under
Mr. Chávez. ''It's the irresponsible and corrupt militarism that has replaced the professionalism of
the industry.''
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Uniqueness Double Bind
Double bind – Venezuela has had catastrophic Dutch Disease – which means either
the DA is inevitable, or the DA is empirically false because Venezuela can rebound
Guerrero, Global Finance Magazine, 9
[Antonio, March 2009, Global Finance Magazine, “LATIN AMERICA; THE PARTY'S OVER”, Pg. 18
Vol. 23 No. 3, Lexis, accessed 7-10-13, AFB]
For the past few years, Venezuela has been the envy of many Latin American governments as the
country filled its coffers with petrodollars from an oil sector windfall. Yet, with oil prices down by
some 75% since their peak last July, Venezuelan president Hugo Chavez will have a difficult time
funding the spread of his "Bolivarian revolution" throughout the region, leaving political allies,
also feeling the pain of falling commodity prices, to fend for themselves. The situation, combined
with the impact of the global economic downturn, puts Latin America at a significant crossroads.
Oil accounts for 94% of Venezuelan export revenues--compared with 68% before Chavez took office a
decade ago. As a result, oil prices represent a major factor in determining economic growth. With Chavez
using much of the recent windfall to fund what he calls his "21st century socialism," falling oil prices will
make 2009 particularly difficult for his social programs. Oil contributes almost 50% of Venezuela's
federal budget, which contemplates a 22% spending increase for this year, but was premised on prices
being at $60 a barrel instead of the current price closer to $35. The price had been as high as $147 a barrel
last year.
Chavez says social spending will not be jeopardized, though he has warned that the country will need to
tighten its belt. With the administration still needing to maintain political support at home, many of the
cuts will probably be seen on the international front. Chavez currently sells subsidized diesel to Bolivia,
where he also helps fund social programs led by president Evo Morales, a close political ally. He also
provides Cuban president Raul Castro with an economic lifeline by supplying the cash-strapped island
with 100,000 barrels of oil per day. And under the Petrocaribe program, Venezuela sells oil to Central
American and Caribbean nations at subsidized prices and on preferential terms, including stretching
payments over 25 years.
When Argentina shut itself out of international capital markets after its record $100 billion debt default in
2001, Chavez stepped in to purchase all new Argentine bond issues, becoming the country's only major
source of external financing. The government offered to finance the construction of planned oil refineries
in Ecuador and Nicaragua, two other key allies. Chavez went so far as to provide cut-price heating oil for
poor families in New York City and to subsidize public transportation in London.
Funds for Venezuela's unprecedented generosity have been drawn from the government's move to tap
revenues from the PDVSA state-owned oil company and dipping into foreign reserves. Under a 2005
reform, the central bank must turn over "excess reserves" to the government each year for discretionary
spending. When the government in January transferred $12.5 billion in international reserves to the
Fonden state development fund, Fitch Ratings warned that the move weakened the country's economic
position by lowering reserves by 30%, to $29.5 billion.
Generosity Comes at a Price
"Over the past few years under the Chavez administration fiscal discipline has gone by the wayside,
exacerbated by the use of oil-driven revenue to foment political ideology," says Francisco Gonzalez,
director of the international services group at the law firm of Adorno & Yoss in Miami, which advised
previous Venezuelan and Bolivian administrations on privatization policies. Gonzalez argues that for the
past 75 years Venezuela has failed to curb its "severe dependency on oil revenue" and has also become
overly dependent on imported goods. Imports are partly blamed for the country's 30.9% inflation rate,
which remains the region's highest.
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"Spending by PDVSA domestically continues to be an important destination for oil revenues, as the
company is the largest employer and the largest buyer of goods and services," comments Gonzalez. "The
problem is that now public sector and PDVSA spending have become one and the same, and PDVSA has
become the government's petty cash." PDVSA currently owes suppliers nearly $8 billion.
Eliot Kalter, senior fellow at the Center for Emerging Market Enterprises at the Fletcher School at
Tufts University in Washington, DC, says the lack of diversification poses a problem for Venezuela.
"International advisers have for years advised the Venezuelan government to diversify out of its
reliance on the oil sector for exports and government revenues. However, this advice has not been
taken," he adds, "and the non-oil sector has declined in importance, both as a source for
government revenues and employment. 'Dutch disease' [caused by a rapid growth in resource
industries that crimps growth in other industries] has reduced the competitiveness ofVenezuela's
non-export sector as well as its structural ability to recover."
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Internal Link Answers
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Alt Cause – Lack of Property Rights
Alt cause makes it inevitable – lack of enforcement of property rights
Ross, University of Michigan political science professor, 99
(Michael L., Assistant Professor of Political Science at the University of Michigan, Ann Arbor. His
forthcoming book is on the impact of commodity booms on state institutions; it includes case studies of
the Philippines, Indonesia, and Malaysia, 1999, World Politics The Johns Hopkins University Press. “The
Political Economy of the Resource Curse,”
http://muse.jhu.edu/journals/world_politics/v051/51.2er_karl.html#astnote, P.319, Accessed: 7/13/13,
LPS.)
A second promising approach might link the resource curse to the failure of states to enforce property
rights. This could take two possible forms and would only apply to a subset of relatively poor and
unstable resource exporters. First, both economic decline and resource dependence might be
independently caused by poorly enforced property rights. When the enforcement of property rights
is exceptionally weak, manufacturing firms should find it difficult to operate since the risk of lost
investments cannot be offset by normal profit margins. But resource extraction can still proceed, since
firms earning resource rents can afford to pay criminal gangs, private militias, or nascent rebel armies for
the private enforcement of their property rights while still earning a normal profit. The result is a state that
grows slowly, and where resource extraction, by default, forms a large proportion of all commercial
activity. 65 In this first scenario, the correlation between slow growth and heavy resource exports is
spurious: both are the result of poorly enforced property rights.
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Alt Cause – Remittances
Alt cause – Remittances cause Dutch Disease
Mumo, business reporter at Nation Media Group, 12
(Muthoki, 2-4-12, The Nation (Nairobi), “Diaspora Cash Hurts Economy, Study Shows”, Lexis, accessed
7/13/13, QDKM)
Kenyans received Sh75.7 billion in remittances from abroad last year, but experts warn that if not
managed properly, such income could end up harming the country's economy.
Studies conducted over the last five years indicate that in certain circumstances remittances can
have a degenerative effect on economies of developing countries.
"Generally, remittances are very good. However, they do have the potential of increasing the poverty
gap," said University of Nairobi economist Joy Kiiru.
In her 2010 paper titled Remittances and Poverty in Kenya, Dr Kiiru states that contrary to popular
perception, the poor are often not the direct beneficiaries of remittances.
Quoting a study conducted in Pakistan, she points out that most impoverished households cannot
afford to send a family member abroad. It is the middle class and the wealthy who can afford to
pay for extended educational tours and plane tickets, and more often than not, it is they who receive
remittances.
Therefore, money remitted can end up making the rich richer without improving the plight of the
poor.
"Remittances, unlike other sources of foreign exchange, are targeted at the individual. Although this can
be an advantage, it also means that there will be imbalances in the level of development if we rely
extensively on them," Dr Kiiru said.
Additionally, many families that receive money are not motivated to remain productive. Studies on
remittance-receiving communities in Asia by an IMF research team indicate that steady remittance flows
can act as disincentive for young people to look for jobs.
"Remittance-receiving households work fewer hours and invest less in economic ventures that are
productive in the short-term," said the 2010 paper by David Grigoria.
Another possible negative effect of remittances is the so-called Dutch disease, a term coined by The
Economist in 1977 to describe what happens when large inflows from natural resources or foreign aid
lead to the decline of a country's manufacturing sector.
The inflow of cash generates demand for non-tradable goods, which in turn leads to an increase in
prices and induces appreciation of the real exchange rate.
In the long-term, the demand for non-tradables can lead to re-allocation of labour and resources
away from the tradable sector while domestic manufacturing industries become less competitive.
A 2010 study on 34 sub-Saharan African countries conducted by the University of Pretoria
validated this Dutch disease theory. However, it noted that the impact in sub-Saharan Africa was yet to
become as pronounced as has been observed in some Eastern European countries.
In the same way that aid can diminish incentives for governments to implement welfare reforms, a
remittance glut can create the illusion of well-being and lead to poorly developed systems.
"Remittances are external sources of funds. Overdependence could lead to the same institutional
weaknesses that have resulted from aid," said international relations scholar Prof Macharia
Munene.
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Research Flawed
Dutch Disease research is flawed – poorly constructed samples and hypotheses
Ross, Assistant Professor of Political Science at the University of Michigan, Ann
Arbor, ‘99
(Michael L., Assistant Professor of Political Science at the University of Michigan, Ann Arbor. His
forthcoming book is on the impact of commodity booms on state institutions; it includes case studies of
the Philippines, Indonesia, and Malaysia, 1999, World Politics The Johns Hopkins University Press. “The
Political Economy of the Resource Curse,”
http://muse.jhu.edu/journals/world_politics/v051/51.2er_karl.html#astnote, P.299, Accessed: 7/13/13,
LPS.)
From the 1950s to the 1970s, the question of resource wealth was at the center of debates between
mainstream development scholars and their Marxist and non-Marxist critics. Since then, the study of
resource wealth and development has grown less ideological and more empirical, and the quality of the
empirical work has improved sharply. Yet with the ideological stakes lowered, research on this topic
has grown lamentably fragmented: economists and political scientists seem to be unaware of each
others' contributions, and political scientists are often divided by their area specialties. One purpose
of this article is to better acquaint scholars with each others' work, and to show how recent studies from a
wide range of subfields can cast light on the special problems of resource exporters.
A second aim is to compare the approaches of economists and political scientists to this issue. Since the
1950s economists have continued to investigate a small number of powerful explanations for the resource
curse, employing better data sets and increasingly sophisticated statistical tools. Some of their findings are
incomplete and unsatisfying; still, they contain significant results.
Political scientists, by contrast, have produced scores of explanations for the resource curse and an equal
number of case studies, yet have rarely tried to test their theories with either well-selected
comparative cases or large-N data sets. Their reluctance to test almost certainly reflects the
obstacles that political scientists commonly face in the developing world, where data can be poor,
missing, or prohibitively costly to obtain. It may also reflect, however, a disregard for the practice
of hypothesis testing. Whatever its origins, the absence of hypothesis testing has had two lamentable
consequences: there has been little accumulation of replicable findings on the policy failures of
resource exporters; and absent the need to render their theories testable, many scholars have
neglected tasks that would help refine and sharpen their arguments--carefully defining their
variables, specifying the domain of relevant cases to which their arguments apply, and framing their
causal arguments in generalizable, and falsifiable, terms. The ultimate result has been a widening
gap between our improved understanding of the economic predicament and our still weak
understanding of the political predicament of states that rely heavily on commodity exports.
Their studies are flawed – the impact to Dutch Disease is exaggerated and can be
offset
Ross, University of Michigan political science professor, 99
(Michael L., Assistant Professor of Political Science at the University of Michigan, Ann Arbor. His
forthcoming book is on the impact of commodity booms on state institutions; it includes case studies of
the Philippines, Indonesia, and Malaysia, 1999, World Politics The Johns Hopkins University Press. “The
Political Economy of the Resource Curse,”
http://muse.jhu.edu/journals/world_politics/v051/51.2er_karl.html#astnote, P.305-307, Accessed:
7/13/13, LPS.)
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In the early 1980s, the Dutch Disease looked like a promising explanation for the ailments of resource
exporters. More recent research suggests, however, that it is less common in developing states than
originally thought, and that governments can usually offset its impact, should they feel it necessary.
Journalists sometimes use the term "Dutch Disease" to refer to all [End Page 305] economic hardships
associated with resource exports. 29 More formally, however, it describes the combined influence of two
effects that commonly follow resource booms. The first is the appreciation of a state's real exchange rate
caused by the sharp rise in exports; the second is the tendency of a booming resource sector to draw
capital and labor away from a country's manufacturing and agricultural sectors, raising their production
costs. Together these effects can lead to a decline in the export of agricultural and manufactured goods
and can inflate the cost of goods and services that cannot be imported (the nontradable sector). 30
Empirical studies now suggest that the Dutch Disease may be less common in developing states and more
easily counteracted by governments than initially thought. 31 Gelb's study of seven oil exporters during
the 1971-83 boom found that only four showed a shift of labor and capital away from their agriculture and
manufacturing sectors and toward their resource sectors. Other studies have found that the manufacturing
sectors of most mineral economies are unharmed by export booms, though their agricultural sectors often
suffer. 32
A careful look at the Dutch Disease model helps explain why it fits many developing states poorly.
The model assumes that an economy's capital and labor supplies are fixed and fully employed
before a boom begins. Under these conditions, a booming resource sector should draw capital and
labor away from agriculture and manufacturing, thus raising their production costs. Yet
developing states often have labor surpluses, and their resource booms draw in foreign capital and
labor, offsetting any local scarcities. 33 The Dutch Disease model also assumes that domestic and
foreign goods are perfect substitutes; if this assumption is eased--reflecting the fact that
manufacturers in developing states often import intermediate goods, which become cheaper when
[End Page 306] the exchange rate appreciates-- then the Dutch Disease may not damage the
manufacturing sector's competitiveness. 34
Each of these four economic effects can create hardships for resource exporters. Yet to explain why these
hardships lead to persistently slow growth--the resource curse--we must also explain why governments
fail to take corrective action. Governments play an exceptionally large role in the resource sectors of
almost all developing countries and, at least in theory, have the policy tools to mitigate each of these
hardships: they can offset a steady decline in the terms of trade by investing in the productivity of their
resource sectors and by diversifying their exports; they can buffer their economies against the vicissitudes
of international commodity markets by using commodity stabilization funds and careful fiscal policies;
they can use their commodity windfalls to promote upstream and downstream linkages; and they can
counteract the Dutch Disease by maintaining tight fiscal policies, temporarily subsidizing their
agricultural and manufacturing sectors, and placing their windfalls in foreign currency to keep their
exchange rates from appreciating.
In fact, when economists actually carry out case studies, they commonly discover the importance of
government policy as an intervening variable. As Neary and van Wijnbergen suggest,
In so far as one general conclusion can be drawn [from our collection of empirical studies] it is that a
country's economic performance following a resource boom depends to a considerable extent on the
policies followed by its government. . . . [E]ven small economies have considerable influence over their
own economic performance. 35
The failure of states to take measures that could change resource abundance from a liability to an asset
has become the most puzzling part of the resource curse. [End Page 307]
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Impact Answers
Gonzaga Debate Institute 13 89
Brovero-Lundeen – Dutch Disease
AT – Hurts Economy
Dutch disease is not a problem – higher commodity prices are good and strengthens
resource sector and depreciating currency is bad
Isfeld, Financial Post, 7
[Gordon, 12-9-07, Financial Post, “Carney squashes ‘Dutch Disease’ diagnosis,”
http://business.financialpost.com/2012/09/07/carney-squashes-dutch-disease-diagnosis/, accessed 7-1213, MSG]
Canada’s central banker dismissed concerns that Canada is suffering from so-called “Dutch
Disease,” saying in a speech to the oilpatch Friday the strength of the country’s resource sector is a
“reflection of success, not a harbinger of failure.”
Mark Carney, speaking at an economic summit in Calgary, said the logic of Dutch Disease “requires
that we undo our successes it order to depreciate our currency.”
Dutch Disease — a phrase that refers to the decline in the manufacturing sector in the Netherlands after
the development of its oil resources in the 1970s — has been used to describe the shift from the eastern
manufacturing hub to the resource-heavy western province.
That has contributed to a stronger Canadian dollar as global commodity prices have continued to
rise, making exports of our manufactured products more expensive.
Higher commodity prices are unambiguously good for Canada
“Most fundamentally, higher commodity prices are unambiguously good for Canada,” the Bank of
Canada governor said in a speech to the annual Spruce Meadows economic round table.
“The strength of Canada’s resource sector is a reflection of success, not a harbinger of failure.”
Dutch Disease is offset by gains from oil production – helps purchasing power and
the Dutch Disease debate was pushed because of politics
Graveland, The Canadian Press, 13
[Bill, 3-5-13, The Globe and Mail, “The good news is manufacturing is not victim of Dutch disease:
studies,” http://www.theglobeandmail.com/report-on-business/economy/canada-competes/the-good-newsis-manufacturing-is-not-victim-of-dutch-disease-studies/article9332646/, accessed 7-12-13, MSG]
The theory behind Dutch Disease – a term coined to explain the hollowing out of the manufacturing
sector in the Netherlands – holds that a boom in the resource sector causes a currency to appreciate,
undercutting exports of manufactured goods. It has some adherents among economists, including the
OECD.
It became a political football in Canada last year when NDP Leader Tom Mulcair blamed Alberta’s
oil riches for some of the economic problems facing Ontario and Quebec.
Mintz and Krzepkowski argue that employment in manufacturing has been falling over the last 35
years throughout most OECD countries.
“Casting blame for lost manufacturing jobs on commodity prices ignores the inevitable fact that,
even if the dollar begins to fall, it is unlikely that those lost jobs will return,” the report reads.
The second report by Trevor Tombe and Wardah Naim finds a higher Canadian dollar may actually
help manufacturing because of increased purchasing power, which the authors say lowers both the
cost of goods and the cost of production.
“A higher dollar may make it more expensive for foreign buyers to purchase Canadian
manufactured goods, but that effect appears to be more than offset by the savings that Canadian
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producers enjoy with a higher dollar that makes possible cheaper imported-inputs and lower cost
of production, which have a lowering effect on prices,” the authors write.
Mintz said the Dutch disease debate in Canada is about politics.
“The NDP has pushed it partly because they’re hoping to grab votes away from Ontario and certainly
impact on the coalition that the Conservatives have built between Ontario and the West,” he said.
“Obviously there’s something else that is going on and policies that you need to address these things
are going to be different. It’s not a matter of closing down the oilsands to save the manufacturing
industry.”