Resource Curse or Dutch Disease aka “Petrodollars”

 Many discussions of the impact of oil discovery and exploitation focus on the Dutch Disease. Simply put, the economic benefits of a large oil discovery may be muted by the repercussions that can impact an economy. For example, the production of oil may attract domestic resources, such as finance and labour, with a consequent negative impact on other industries, and, even more acute, the spending of the profits from oil may have a major negative effect, known as the Dutch Disease. The Disease occurs when the funds result in an increase in the exchange rate, owing to the export of large quantities of oil, and in the subsequent reduction in the cost of imports, which makes local industries, such as agriculture, less competitive, and there is a consequent reduction in employment in these industries.

 Canada is not protected from these negative impacts, especially the impact on the exchange rate. Norway solved the problem to a large extent by, in effect, shipping the foreign currency, e.g. the US dollars in its Petroleum Fund, to other countries to earn interest payments, which spread out the impact over many years. The effect is to nullify the increase in the exchange rate to a large degree. This option is not available in any degree to the Canadian Government, since most of the profits accrue to the private sector and are spent on foreign non-financial products.

The economic significance for Canada of the Dutch Disease depends on the relative size of oil exports in the economy. Norway, a small country with a relatively large export of oil in relation to its GDP, was likely to have suffered greatly from oil exports if the Government Petroleum Fund had not existed. Given a large enough increase in oil production, Canada would become impacted by the Dutch Disease.

Alasdair M. Sinclair, Professor of Economics (ret’d), Dalhousie University

 

Ed. Note:  Decades ago the Alberta Government established its Heritage Fund to be the recipient of royalties generated in boom energy years. The Heritage Fund did grow but in more recent times successive Alberta Governments drew heavily from the fund rather than increase taxes to cover potential deficits. If the Alberta Government was simply trying to be re-elected, that made sense, yet by the principles on which the Norwegian Governments operate it doesn’t.

The conclusion:  unless pressured by the electorate, Canadian politicians can’t be expected to act according to principles that are future –oriented.  Their focus is  getting re-elected the next time Canada goes to the polls!

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