Shortly thereafter, first royal dutch shell and then rockefellers standard oil became major producers of oil in venezuela. He used the phrase dutch disease to refer to foreign currency inflows that keep the currency stronger than it should be, reducing the competitiveness of domestic enterprises, thereby boosting imports and hurting exports. By 1929, the dramatic development of the venezuela oil industry had begun to dominate all other economic sectors in the country, however, agricultural production began to decrease dramatically. There is a discourse focused on rentierism in venezuela that goes as follows. Catching the malady has long been a concern in norway, western europes biggest oil and gas producer. Dutch disease taught economists that a large commodity boom from a natural resource can cause extreme economic distress, cursing the economy for years to come. Oil and macroeconomics dutch disease, opec, oil prices. Venezuela crisis explained short documentary 2017 youtube. This approach highlights that the \ disease is just one aspect of many important e ects and interactions generated by an oil. The first is the bolivarian revolution and second the dutch disease. But contrary to some theories, such as that of dutch disease, oil is not the problem of the venezuelan economy, the problem lies in how the vast amounts of resources generated from oil. This paper integrates the existing dutch disease models of an oil boom into a reducedform threesector model and estimates it for five developing oilexporting countries having significant agricultural and manufacturing sectors. Egert and leonard 2006 find less significant dutch disease symptoms but find support for.
There are technical terms for it dutch disease, resource curse, petrostate. Section iii describes the empirical model and the data and econometric issues. But contrary to some theories, such as that of dutch disease, oil is not the problem of the venezuelan economy, the problem lies in how the vast amounts of resources generated from oil were utilized. In 2008, crude oil production in venezuela was the tenthhighest in the world at 2,394,020 barrels per day 380,619 m 3 d and the country was also the eighthlargest net oil exporter in the world. The economist explains what dutch disease is, and why it.
The economist explains what dutch disease is, and why its. This paper integrates the existing dutch disease models of an oil boom into a reducedform threesector model and estimates it for five developing oil exporting countries having significant agricultural and manufacturing sectors. Gomez allowed multinational companies to extract oil from the subsoil, which in venezuela is owned by the government. Venezuelas descent into chaos buries the lefts hopes of. Rahmati sharif university of technology august 8, 2018 rahmati sharif energy economics august 8, 2018 1. Venezuela the country with the largest oil reserves is facing a food shortage today. The economics, culture, and politics of oil in venezuela. The symptoms of the dutch disease are observed in the prolonged currency overvaluation during the high oil revenue periods. Dutch disease definition, disadvantages, and how to avoid. It is primarily associated with a natural resource. The statistical evidence on natural resources and economic performance b.
Illustrating stories from around the world in 3 minutes. When the raw materials run out, the economy can be in a worse position than before. Assessing whether oil dependency in venezuela contributes to national instability. Dutch exports of goods and services, 196097 % of gdp source. The empirical study found that the latecomers of lao peoples democratic republic and myanmar seemed to suffer from the dutch disease over the sample period for 19702015. Dutch disease is an economics term that refers to the negative consequences arising from large increases in the value of a countrys currency. Jan 24, 2019 venezuela, home to the worlds largest oil reserves, is a case study in the perils of petrostatehood.
The natural resource curse and possible channels a. All you need to know about venezuela s looming implosion. Pdf dutch disease and venezuelan economics in retrospective. In many countries, natural resources have been detrimental to the economic development. Static dutch disease increased oil price and oil activity.
Apr 18, 2016 this represents a strain of whats called dutch disease. This paper shows that the dutch disease can be more formally characterised as low. Jul 03, 2019 dutch disease is an economics term that refers to the negative consequences arising from large increases in the value of a countrys currency. World war i was the trigger introducing venezuela into the world oil market. Mar 07, 2017 venezuela the country with the largest oil reserves is facing a food shortage today. Timeseries annual data for the period 19661986 are used for algeria, ecuador, indonesia, nigeria and venezuela. Kutan and wyzan 2005 find that significant dutch disease symptoms are present in kazakhstan. Jan 24, 2018 to investigate the efficiency and stability of venezuelas oiloriented economy, this paper applied entropy to the analysis. We now investigate the response of the static equilibrium to an increased oil price and oil activity. This economic disease is caught whenever a commodity brings a sudden increase of income in one sector of the economy, which is not matched by increased income in other sectors of the economy. The past, present and future of venezuelas oil industry. Its the ultimate case of dutch disease, a country now rotten from depending far too much on the export of. The dutch disease refers to the problems associated with a rapid increase in the production of raw materials like oil and gas causing a decline in other sectors of the economy. More generally, the dutch disease paradoxically connects with the negative effects of the economic rents generated by great discoveries or the abundance of natural resources such as gold, oil, and gas.
The booming sector is usually the extraction of natural resources such as oil, natural gas, gold, copper. Guyana, a country of about 780,000 which shares a border with brazil, suriname and venezuela in the northeast of south america, will see economic. In academic circles its called dutch disease, a term that was coined after the netherlands suffered a decline in. The deindustrialization of a nations economy that occurs. He argues that norway managed to escape the resource curse and the dutch disease from the.
The problem is that 90 percent of the saudi labor force is employed by the government. In venezuela and angola, the discovery of black gold has depressed productivity and income. The authors are mainly students at the johns hopkins university in baltimore. Jun 18, 2018 an astute observer of the indian economy asked me this question a few months back. In the model, there is a nontradable sector which includes services and two tradable sectors. Catching the malady has long been a concern in norway, western europes biggest oil.
One of the potential dangers of oil booms, for example, is that exchangerate appreciation renders the non oil tradeable. The dutch disease syndrome is only partly taken into account. How venezuelas oil created an incurable case of dutch disease. But unable to manage it alone, venezuela depended on standard oil, gulf, and royal dutch. A comparative study of kazakhstan and norway ekhk18 15ects. Oil has shaped venezuelas politics and dominated its economy ever since vast oil reserves were discovered in 1922. One popular trope blames oil as both the source of the countrys riches and misery.
Endowed with massive oil reserves, venezuela had periodically suffered from dutch disease since it nationalized petroleum production in the 1970s, with its staterun enterprises engaging in. Our model incorporates the exchangerate e ects highlighted in the dutch disease literature, but also incorporates a spectrum of other general equilibrium e ects. Curseopecprice oil and macroeconomics dutch disease, opec, oil prices mohammad h. Second, the fund asserts venezuela is overheating, has capacity constraints and wagefuelled inflation. The studies in applied economics series is under the general direction of professor steve h. The magnitude of negative macroeconomic consequences of the dutch disease depends on the countrys economic structure and stage of development. Based on this method, venezuelas oilcentered industry, inefficient regulatory system, and insensitive response to external changes are recognized as an increase in the countrys entropy. The negative influence of dutch disease on the economy can be explained by some features attributable to the sectors that are related to natural resources. This paper argues that the ongoing dutch disease is a natural and necessary reallocation of resources in the economy of equatorial guinea. In the netherlands, nigeria, venezuela and elsewhere, oil has pushed out other sectors, in this case dairy, cocoa beans, coffee and. Section ii illustrates the relationship between resource richness, growth, and governance, with particular attention to botswana. Oil represents more than 90 percent of all exports and more than 60 percent of government revenues.
The term was coined by the economist in 1977, but what does it mean. The canadian dollar is increasingly viewed as a petrocurrency in the 21st century. These arguments are intended to imply venezuela has succumbed to dutch disease, allowing the appreciation of oil revenues to eliminate industrial diversity and mask bottlenecks that only show up in the inflationary data. Escaping the natural resource curse and the dutch disease. Dutch disease and venezuelan economics in retrospective. The first commercial drilling for oil in venezuela occurred in 1917, however the existence of oil was known before this. Following the discovery of natural gas in the black sea in the 1970s, the dutch manufacturing sector began to experience a significant decline. When oil for example is discovered, vast amounts of resources are required in order to extract it from the ground. The classic economic model describing dutch disease was developed by the economists w. Egert and leonard 2006 find less significant dutch disease symptoms but find support for the hypothesis that the real exchange rate in. He recently spoke to about the current crisis in the caribbean countrys oil industry. Norways catching up with and forging ahead of its neighbors growth studies show, counter to intuition, that the discovery of a natural resource may be a curse rather than a blessing since resourcerich countries grow slower than others. Since its discovery in the 1920s, oil has taken venezuela on an exhilarating but dangerous. Dutch disease is a concept that describes an economic phenomenon where the rapid development of one sector of the economy particularly natural resources precipitates a decline in other sectors.
By the 1930s, an economic doctor would diagnose some dutch disease. Venezuela essentially suffered from dutch disease because the chavez administration focused primarily on its oil industry while it neglected its manufacturing and agriculture sectors. Feb 22, 2018 an abundance of oil and gas can be a curse if not managed properly. Latin america lecture 16 venezuela flashcards quizlet. In 19, dictator juan vicente gomez issued a concession to explore twelve of the twenty venezuelan states for oil to the royal dutch shell oil company. The imf thinks this country will see growth of 86%. The dutch disease to further complicate matters, venezuela is plagued by the dutch disease an economic phenomenon associated with the resource curse. Perhaps the most evident effect oil has had on venezuelas economy is the appearance of the dutch disease. Oecd reports on netherlands, various issues 1 according to the handbook of development economics the dutch disease is defined as. Venezuela is unique in dependence on oil during 1960s and 70s robust democracy among dictators, since 98 has been the poster child for the decline in liberal democracy.
When king salman ascended to the throne last year, he decreed a bonus for all government employees. Jan 14, 2018 the dutch disease refers to the problems associated with a rapid increase in the production of raw materials like oil and gas causing a decline in other sectors of the economy. A large increase in natural resource revenues can hurt other sectors of the economy, particularly exportbased manufacturing, by causing inflation or exchange rate appreciation and shifting labor and capital from the nonresource sector to the resource sector see revenue management reader. The imf thinks this country will see growth of 86% in. Essentially, local currency appreciates as a result of high demands for a given commodity.
In present work, venezuela is taken as an example for further analysis of dutch disease symptoms. Oil, corruption and the resource curse projects at harvard. The monetary and fiscal history of venezuela 19602016. Within a few years, by 1929, venezuela was the worlds second largest oil producer, after the u. Venezuela is a country situated in the north of south america continent. Our story starts in 1922 when oil was discovered in venezuela. In 19 the concession was transferred to a british dutch operator, the royal dutch shell oil company. However, it was not until 1912 that the first oil well was drilled. Both of these are interlinked with venezuelas petrodollars. Karl says that the dutch disease is curable, but she frequently refers to the presence of oil in venezuela s subsoil as a curse. For example, she approvingly cites juan perez alfonzos characterization of oil as the devils excrement and relates anecdotally a saudi sheiks claim that his kingdom would have preferred to have found water. Edgardo lander over the 15 years of the bolivarian government in venezuela, significant changes have taken place in the political culture, the social and organisational fabric, and the material living conditions of previously excluded lowincome groups. Therefore, diversification out of primary commodities into manufacturing is considered selfevidently desirable for resource richcountries. For example, mining industries generally require heavy capital investments, but they are not laborintensive.
Petrostates are thought to be vulnerable to what economists call dutch disease pdf, a term coined during the 1970s after the netherlands discovered natural gas in the north sea. Venezuela is one of the worlds largest exporters of oil and has the worlds largest proven oil reserves at an estimated 296. Analysis of the dutch disease effect on the selected. Venezuela, led by nicolas maduro, does not have enough money to provide even the most basic services such as healthcare. Venezuela suffered from dutch disease, the process whereby extraordinary foreign currency earnings from exports of natural resources lead a government to increase the monetary sup.
This phenomenon is often referred to in economics literature as dutch disease. The economy experienced high growth rates from 1920 until 1935, when gomez died see baptista 2011. Inflation and hyperinflation in venezuela 1970s2016 a. The economist explains what dutch disease is, and why its bad. Dutch disease can also be analyzed using erling larsens theory, which describes three main factors that explain why significant amounts of natural resources may hurt the rest of an economy4. What is often referred to as dutch disease is shown in fig. Sep 12, 2018 however, similar with most oilexporting countries, venezuela had infrastructures and capabilities that favored oil production and exportation. Dutch disease strong international demand for commodity. Seven years later, their production was second only to the u. Carlos mendoza pottella is an economist and oil expert at venezuela s central bank bcv.
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