There is need to synthesis the concept of Dutch disease; it goes without saying that we can’t relate it to a medical ailment, but it is defined more elaborately as being related to natural resource abundance of a country or a region for that matter. Dutch disease is an economic phenomenon that impacts on countries upon realization, exportation and extraction of large amounts of natural resources, this concept is borrowed from a scenario that took place in the Netherlands after their discovery of natural gas in the North Sea around 1960; this event changed the Dutch economy by bringing about both positive and negative effects.
The term Dutch disease gives the implications of the effects that were noticed in the Netherlands after they sold their natural gas, this led to difficulty when the Dutch manufactured goods could not manage in the international market. There was an increase in the exchange rate leading to the exports not being marketable thus an economic crisis.
It is found that not only Netherlands is associated with this disease but also countries that have natural gas, oil and other tradable natural resources should concern themselves to this matter and the consequences it can bare to the economy, Netherlands quickly recovered from the Dutch Disease, and have persistently seen an upward trend in their exports relative to GDP since the mid-1960s..
An increase in income of a country can be realized by the discovery and exportation of natural resource to both people who inhabit it and the government, this bringing about high exchange rate leading to the inner economy of a developing country to slow down. In this context we examine Saudi Arabia which happens to be the world’s largest oil exporter meaning a great part of its economy depends heavily on oil, this is bound to have a lot of implications politically and economically on this country.
In 1938 the discovery of oil come about in Saudi Arabia, before the kingdom of Saudi Arabia was established in 1932 it consisted of quite a number of regions that lived of specific resources and different activities. This regions united to form a Kingdom and oil was discovered six years later leading to economic change in this regions initially the oil revenues were kept by the ruling family and its allies. Saudis have a belief that the king has the overall authority, politics, labor unions and political parties are outlawed hence their government is accountable to itself.
Saudi Arabia recorded an increase in its revenues in the 70s, the Saudi government initially attempted to slow down the extraction of oil in order to ensure long lasting income but the increasing international demand forced them to think of another strategy, which was an industrial development which was to process hydrocarbons this was to steer the growth of its economy. The first consideration to make when searching for Dutch Disease is heavy oil dependence exhibited by Saudi Arabia.
Other areas where Dutch disease symptoms are highly expected is the manufacturing sector, the labour force, infrastructure and industrialization, agricultural sector, the real exchange rate and inflation. Theory Dutch disease and Saudi Arabia Our consideration when it comes to this case is based on the number of studies that have been done about the Dutch disease in Saudi Arabia based on questions like, has Saudi Arabia ever suffered from the Dutch disease and if so what political or economic implications has it brought to the Saudis?
The most affected areas are well introduced in the beginning of this paper the first and the ultimate one is the heavy dependence of Saudi Arabia on oil export this leading to high revenues for the country of up to 84% and an increase in revenue automatically brings about an increase in the exchange rate causing inflation as more money increases demand and consequently prices. Other areas predicted by the theory of the Dutch disease are the manufacturing sector which is expected to decline as the rate of exchange increases which makes it more expensive than the foreign manufactures.
The agricultural sector is also expected to suffer according to the Dutch disease theory as the labour will move from this sector to the booming sector The movement and spending of resources effects predict shifts in the labour force between the sectors, not to forget De-industrialization and decline in infrastructure as some of the theories explaining the Dutch disease since this two development parameters operate mutually. Even though all the above explain the Dutch disease in the context of the effect of the abundance of natural resource.
Taking the case study of Saudi Arabia in reference to the theory of the Dutch disease we can consider the parameters that are used to measure this ailment first, considering the real exchange rate and the response of the Saudi government. The Dutch disease theory predicts that there will be an appreciation as a result of resource boom, figures dated back to 1973 to1976 show that there was a real exchange appreciation illustrated and through 1977 to 1980 there was depreciation all through to 1984 and this shows that there was an exchange rate balance.
In the case of inflation, which is common in Dutch disease, affected countries, in Saudi Arabia structural factors had contributed to the rising inflation. Increase in liquidity was the main cause of Saudi inflation in the 1970s due to high oil revenues for the first stock; the Saudi government to finance economic development introduced the liquidity. High inflation was experienced in the 1975 of 35% then it later declined and continued fluctuating around 5%and-5%. The Dutch disease theory predicts a decline in the manufacture sector since domestic manufactures are more expensive than foreign manufactures.
In Saudi Arabia the manufacturing sector was already small before the discovery of oil so the oil revenues just brought about opportunity to expand domestic manufacturing sector thus the manufacturing sector increased instead of declining as expected with the theory. A possibility of a decline in the agricultural sector is predicted by the theory, as the agricultural labour will move from this sector to a more booming one but in Saudi Arabia despite the decrease in agricultural employment there was increased agricultural production especially between 1981 and 84 as a result of the agricultural se4ctor subsidies.
Saudi Arabia suffered an over heated labour market and foreign labour was demanded thus changing the labour force this was to calm the Dutch disease symptoms related to the already overheated market, the private sector imported the foreign workers into the Kingdom the foreign worker have played an important role in the service and oil sectors and contributed a great deal to the Saudi economy
Industrialization has infact been facilitated by the growing oil revenues this was facilitated by the investment of the government in the processing plants that consume hydrocarbon resource this showed how the government tried to diversify the economy this also brought about infrastructure since it led to the building of pipelines for gas, gas gathering systems, building of sewerage, electricity, water, telecommunication systems, ports and laying an immense road network.
From all the above we can draw an inference whether the Dutch ailment has affected Saudi Arabia, and their management of the symptoms despite having the right prerequisite for the Dutch disease we see that oil contributes a great deal to the Saudi Arabian economy it also constitutes the major part of government revenues. The high liquidity resulting from increase in oil revenues led the high inflation which resulting from the changes in the real exchange rate.
The booms from oil also resulted to the overheated labour market which necessitated the need for foreign labour; all these revelations tend to point towards the Dutch Disease even though others didn’t follow the trend of the Dutch Disease theory, examples being a decline in the manufacture sector, agricultural sector which recorded both parameters an increase.
So the conclusion that can be drawn from this is that even though Saudi Arabia has suffered from Dutch Disease relatively the country didn’t suffer from this disease as the theory only explains the real events in the economy. The theory assumes that the Disease related problems happen if no precautions are taken after large capital inflows. The Saudi government before the first oil boom was implementing several policies and development efforts.
These development efforts and policies brought about quite a number of negative economic implications such as increased prices, housing shortages, high demand etc. But viewing this other way it also brought about the establishment of the hydrocarbon industry hence expansion of the economy, and also prevented many Dutch disease related problems to occur. Earlier on before the oil booms, combined development efforts and the manufacturing industry that was coming up prior to the oil booms does help to elaborate why this area did not undergo the latter.
Without the intervention of the government, the effect of the real exchange increase on the manufacturing sector would have conquered leading to the sector declining as observed by the theory of the Dutch Disease. Saudi Arabia also managed to evade the Dutch disease by observing and funding the development efforts through the oil revenues Saudi Arabia has clearly elaborated how natural abundance can be of great use and not a reason to moan, even though it has very limited suffering of the disease.
A number of oil producing countries are dependent on their oil revenues and it is not a possibility that they have all suffered from the theory of Dutch Disease Saudi Arabia being one of them. From the above literature we focused mainly on the economical aspect of the Dutch disease but a study on the political impact of this ailment can as well be undertaken taking into account the concept of the Dutch disease. Political Dutch Disease
Consider a political surrounding with an elite and followers and not assuming the economic prowess provided for by a productive sector e. g. a natural resource. The wealth inherited by the elite from previous generations an example being the Saudi kingdom the oil boom lead to the power consolidation of the kingdom more so the leaders of the kingdom in comparison the Dutch disease result in a slow growth only if the leader motives are weak. Examination of how political regimes is influenced by the sectoral changes in the economy by abundance in the natural resource.
Empirical results by Ross (2000) and Wantchekon (1999) established a significant relation between authoritarian governments and resource dependence, human capital, income inequality, and others like controlling for GDP. We find that there is evolution of allocation of political power when resources are discovered and this brings about income inequality between the larger population and the small political clique, thus we can say that resource abundance brings about an increase in income inequality due to indirect and direct effect
The direct effect is attributed to the control of the government by the elite, which allows it to obtain a larger share of the abundant resource while the indirect aspect is the decline economically following it due to Dutch disease thus increasing the income non proportionality since gains from growth are evenly distributed than the resources. This is so since the elite has the authority to decide which resource goes where and this power leads to intense lobbying by the members of the populace. The cost of lobbying reduces the rate at which human capital is accumulated.
Our model of political elite controls the government and there is no opposition also it follows by an assumption that resource rent claims by the generation of the elite has been inherited, thus income generational transfers, this brings about the need for democratization due to popular pressure for democratic regime. We find that an increase in revenue leads to the elite to increase the spending thus inducing rent seeking as a way of redistribution of resources. In many resource dependent countries governments that are centralized maintain the monopoly of the extraction sector and ownership.
Taking Saudi Arabia as an example where we find political opposition to the ruling family is propelled by the fact that the private citizen only acquires government wealth thus access to jobs, information, contracts in the public sector governed by family relations. Due this limiting the support of many there is the adoption of the “patron to client “ method where resource abundance and its ability to influence the elite in generating political support through spending on patronage networks is on focus.
For instance in countries that exhibit the federal system of governance where the resource rents accrue directly to the federal system of governance which is later responsible for the redistribution of the resource contributing to a political system of institutionalized patronage (Bienen (1995)). In countries like Saudi Arabia their oil wealth allows the government to strengthen their political grip in the country by buying of the political opposition.
Thus it is clear that an increase in the resource rent leads to an increase in the elites political stature but we can always say that the difference between a democracy and authoritarianism is that while democracy is about the people who mandates its legitimacy an authoritarian regime can only be dismissed through political violence and a revolution thus authoritarians maintain themselves in power through repression of political dissent.
All these show that resource booms lead to great political power of the elite and this illustrates the direct effects of resource booms on income distribution. Knowledge is affected by increase in resource rent through the effects of consumption. This is sop since services can only be realized domestically while importation of manufactures can be implemented.
This proposal implies that a stronger motive on the part of the elite can lead to greater spending in any increase in the resource rent thus lessening the impact on human capital. The Dutch disease is said to be having a maximum potential of infecting countries that don’t even have a national currency in this matter the natural resource boom is able to pay higher interest rates and also high wages than other potential industries thus making it harder for the previous to maintain the competition.
Thus from all this literature about the political aspect of the Dutch disease it is evident that countries that have a centralized system of governance, if it is not only for positive ideologies of the elites risk to exhibit the Dutch disease a great deal since the political elite has direct link to the abundance of natural resources.
The case of Saudi Arabia is a very good example of this, since Saudi Arabia depends highly on oil export due to the fact that it is a monarchy ruled by a king hereditary leadership is exhibited in Saudi Arabia thus resource abundance is enjoyed by this dynasties this political elites tend to affect a great deal of the income pattern of the populace, thus leading to inequality in income and mostly this effect is felt by the middle class in Saudi Arabia, but we can also say it is not only in this country that this is felt.
An example being your own money and other people’s money for one is bound to treat others money with little respect than there own. For example foreign aid may be unworthily invested lottery winnings can be wasted more than inherited earnings meaning the concern in using the money is inversely proportional to the effort used to make the money.
The existence of natural wealth is not the problem but the aspect of not taking up the necessary remedies to avert the dangers caused by gifts of nature. It is evident that the dynamics emergence of an economy is prevented by the existing natural resources, which act to dampen an already developed economy. We can say natural resources can either be a curse or a blessing. Remedies
There quite a number of remedial procedures that can be carried out to curb the Dutch disease one of them being slowing down the rate of increase of the real exchange rate and boosting competitiveness in the manufacturing sector of a country, division of the boom revenue is another way this can be done by investing in other countries thus reducing the spending effect, it will also provide a steady revenue supply at an appropriate manner for sustainability to be used by other generations.
Another workable strategy is to increase national economy savings to depreciate the capital inflow, which will also reduce the needs for loans to finance deficits, foreign direct investments by the government. Education and infrastructure investment increase competitiveness of the manufacturing sector. All this remedies are workable and have been done and they have all affected the middle class in many ways e. g. increased human capital due the education of the country citizens.
Increase in human capital does lead to the knowledge of the populace thus human resource development which brings about a positive indication towards the Dutch disease since dependence on the heavy natural resource is minimized for a greater part of the economy, industrialization and infrastructure development is another way of reducing ailments of the Dutch disease since this leads to proper and viable employment opportunities for the populace as there is little or no monopoly of the economy by the vast natural resource.
Conclusion Generally we can say that Saudi Arabia felt the Dutch Disease both economically and politically but it did not impact much in the country. Other countries like Norway which is the world’s second largest exporter of oil also exhibited this ailment in a similar way to Saudi Arabia having not much been affected by the Dutch Disease.
Our case study which is Saudi Arabia highly depends on its vast oil natural resource for its revenue thus this made this country vulnerable to the Dutch disease but due to proper resource management and careful consideration of other pillars of the economy it is to this effect that the Dutch disease was contained even though in the early 70s Saudi Arabia experienced some economic difficulties but there was positive recovery later in the years that followed, this difficulties arose due to high revenue collection after the world war two as the country played a major role in the reconstruction of Europe by its vast oil due to high demand at this time by the European countries. It is proper to say not only does it affect countries which depend highly on their natural resource but also ones that tend to monopolize the economy by assuming some other sources of revenue. References 1. Ricky lam and Leonard Wantchekon (2003), Political Dutch Disease 2. Thorvalaur Gylfason, lessons from the Dutch disease: Causes, treatment and cures 3. Cecilia Mussi Rodriguez, Dutch disease in Saudi Arabia 4. Natalie St. Hlaire (2004), Dutch disease, oil and developing countries