Book Excerpts: 'Dutch Disease to Energy Transition'

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Title: From Dutch Disease to Energy Transition
Author: Noé van Hulst
Publisher: Clingendael International Energy Programme (CIEP)
Publication: June 2023
Sustainability topics: Energy Transition 🌿

Introduction

From Dutch Disease to Energy Transition was launched in Paris on 30 June 2023. My book provides a personal assessment on the economics & politics of resource-rich countries, based on a review of the vast academic literature, as well as on personal memories and reflections gathered in roughly 35 years of working for the Dutch government and international organisations (IEA, IEF, IPHE). This article provides some key excerpts and insights from the last chapter on lessons learned and conclusions. 

Navigating the narrow path of tackling Dutch Disease & the resource curse

Is the abundance of natural resources the equivalent of the biblical ‘manna from heaven’ that provides a country with a permanent economic advantage compared to resource-poor countries? In practice, it turns out this is seldom the case, although it seems counter-intuitive. Commodity prices go through long boom-bust cycles that can be very unsettling and destabilising for countries whose economies predominantly depend on natural resources like oil and gas. Furthermore, when the exploitation of natural resources starts to dominate the economy, often other sectors such as the manufacturing industry get crowded out and suffer. This is what happened in the Netherlands after the discovery of natural gas in 1959, hence the term ‘Dutch Disease’, coined by The Economist in 1977.¹ On the political side, it has often been observed that resource-rich countries seem to be less democratic and more prone to corruption and violence or even civil war, compared to resource-poor countries.² Hence the popular term of the 'resource curse’. 

In the book, I demonstrate how incredibly challenging it is for governments of oil and gas producing countries to combat or avoid Dutch Disease and the Resource Curse. This is the case even for governments with the strongest determination and political support for policies pursued. I certainly agree with all experts that stress the abundance of natural resources does not need to be a ‘curse’ for countries and that the destiny of these countries is not cast in stone. Leadership does matter a lot and so do sound policies. It really boils down to navigating the way along a narrow path, avoiding the numerous pitfalls while nurturing fiscal prudence and advancing steadily on economic diversification away from natural resources, including decarbonisation. 

It is a very tough challenge. Nearly as tough as Odysseus’ journey back home after the Trojan War had ended, resisting the calling of the Sirens and sailing the narrow straits between Scylla and Charybdis, among many other obstacles. A separate chapter on case studies from around the world lays out in some detail how countries as different as the Netherlands, Norway, Saudi Arabia, Venezuela and Nigeria have paved their own path in struggling with the challenges at hand. In the chapter on the global energy transition, I conclude that the unstoppable global energy transition has stepped up the already-tough challenge by adding an emerging deadline to the process of economic diversification. With a considerable part of the global economy moving to net-zero emissions by 2050 (or soon after), the energy transition becomes the sword of Damocles hanging over the head of oil and gas producing countries. They have no time to lose and delays in economic diversification and decarbonising fossil-fuel exports are becoming potentially very costly.   

That said, there really is no single set of clear-cut policy recommendations that can be successfully applied anywhere in the world. Very often, Norway is portrayed as the model all resource-rich countries should follow. While I agree that there are useful lessons to learn from Norway’s experience, even Norway is also still struggling with the momentous and underrated challenge of reinventing its business model for the post-fossil fuel era. Apart from this, it is rather meaningless to recommend to the government of a developing country with huge natural resources to “become Norway”, as oil in Norway was discovered when the country already was fairly industrialised and blessed with strong institutions. 

So, what are the lessons learned and which policies can we recommend?

Stabilise your macroeconomic game

Without a strong stabilising, anti-cyclical fiscal policy, the economy of any resource-rich country will ride the wild waves of the boom-and-bust cycles of commodity prices. In other words, it will show much greater macroeconomic volatility than resource-poor economies. In addition, such a resource-rich economy will risk becoming overly indebted because spending the windfall revenues during booms is so much easier than slashing expenditures once commodity prices tank. In practice, very few resource-rich countries manage to avoid this kind of volatility by saving enough money for rainy days. Botswana, Chile and Norway are among them, as well as Saudi Arabia in more recent years.

Create a big Bazooka investment fund & plan for economic diversification and energy transition

It is hard to overestimate the importance of consistently building up a large, strong sovereign wealth fund to prepare for the long-term future when resource revenues start dwindling. The unstoppable global energy transition has raised the stakes even more. A big national investment fund can function as a big ‘Bazooka’ to facilitate the country’s path towards full decarbonisation. In the book, it is argued that Saudi Arabia is one of the very few countries to have made tangible progress in this direction by mandating its fund to invest in the energy transition, although there is still a lot more that has to be done. 

Give citizens a direct stake in revenues

There is a strong case to be made for direct cash transfers (handouts) to citizens linked to resource revenues: it alleviates poverty in developing countries, instills a sense of common belonging in countries with strong divisions and encourages transparency and accountability of the government with respect to revenues and spending. Alaska is the only state that has done this annually since 1982.³ It was seriously proposed several times in countries like Iraq, Kuwait and Venezuela, but it got rejected in every instance because governments claimed they knew better how to spend the entire sum of state oil revenues.

Tackle corruption ruthlessly

There is no escaping the conclusion that resource abundance greatly increases the opportunities for corruption. It is like a permanent headwind any government of a resource-rich country must deal with as best as they can. The example of Saudi Arabia in recent years demonstrates that an uncompromising ramp-up of anti-corruption measures can start to make a significant difference, even when still more needs to be done. Transparency and accountability are key ingredients of any effective anti-corruption policy, next to checks and balances in the government system, civil society and independent press which can also be very helpful.

Summing up

To put it simply, navigating the narrow path of tackling Dutch Disease and the resource curse boils down to finding a policy package that is both satisfactory for current and for future generations of the population and well suited to the specific circumstances of the country in question. Current generations would benefit from policies that manage to avoid excessive economic volatility, allow them a stake in resource revenues, and encourage accountability of public spending. For the benefit of future generations living in a net-zero world, nothing short of a strong economic diversification and decarbonisation strategy will do.    

What the international community can do

Nothing can replace the strong domestic policy stance needed to tackle the risks of Dutch Disease and the resource curse. Still, helping producer economies to succeed in meeting the huge challenge of long-term decarbonisation is very much in the interest of the international community, if the world is to have any chance of achieving net-zero emissions by mid-century. To that end, I make the case for broadening the mission and boosting the funding for the World Bank⁴ and other multilateral banks, as well as the relatively new instrument of Just Energy Transition Partnerships with producer economies. I hope COP28 in Dubai will be successful in this respect.

Special attention is warranted for the ‘new kids on the block’, the countries where large oil and gas reserves have been discovered in the last decade or so (e.g. Cyprus, Guyana, Jordan, Lebanon, Surinam, Tanzania). International organisations should assist these countries to help prevent the mistakes that many other resource-rich countries have made. Beginning with avoiding the so-called ‘pre-source curse’ of irresponsibly hiking government expenditures, banking on (uncertain) future resource revenues that may in reality turn out to be smaller than expected or flow in more slowly than hoped.

In addition, the global community should strengthen the global fight against corruption, money laundering and illicit financing, all of which will help counter the risks of the resource curse. Bolstering the international guidelines for Responsible Business Conduct and ESG financing can also be similarly helpful. 

The next decade is decisive

Many experts expect an economic recession in the coming years, as well as structural shifts impacting the global economy like climate change, higher inflation rates and re-structuring of trade value chains towards ‘near-shoring’ or ‘friend-shoring’ (El-Erian, 2022)⁵, but the jury is out on the likelihood of an economic recession.⁶ The latest projections of the IMF do not project an economic recession, although they do foresee weak and shaky growth prospects amidst huge uncertainty.⁷

Leaving this issue aside, commodities appear to be at the beginning of a new ‘super-cycle’ of rising prices. Arezki & Mazarei (2023)⁸ speculate that the current oil price super cycle “may, however, be the last one”.⁹ If such a cycle would indeed materialise, that would definitely boost the economic growth of resource-rich countries. They may perform well, and even relatively better than the resource-poor economies.

The real test, however, will be whether the resource-rich economies are able to use their revenues to significantly advance economic diversification and the energy transition (IMF, 2022)¹⁰. To deploy such policies at a time when there is no urgency whatsoever will require Odyssean self-restraint and rock-solid determination of policymakers. Given the fact that so many large countries are aiming for net-zero emissions in 2050, time is running out for the producer economies. It is therefore not an exaggeration to call the next decade of decisive importance for the question of whether or not the producer economies will succeed in reinventing their business models to ones compatible with the drive to achieve net-zero emissions by mid-century (or soon thereafter). Their success is not only of critical importance for current and future generations in oil and gas exporting countries but also for global climate policy and for geopolitical stability.

References:

[1] ‘The Dutch Disease’, The Economist, November 26 (1977), 82-83.

[2] L. Wenar, Blood Oil, Oxford University Press (2016) is a prominent example.

[3] In 2022 this transfer amounted to $3,284.00, see https://pfd.alaska.gov

[4] A good starting point is Larry Summers’ proposal of a green capital increase of $30 billion which could support an extra $100 billion of annual lending for the energy transition, see L.H. Summers, ’A New Chance for the World Bank’, Project Syndicate, October 10 (2022).

[5] M.A. El-Erian, ‘Not Just Another Recession’, Foreign Affairs, November 22 (2022). 

[6] R. Sharma, ’Economists see recession coming, so maybe it’s not’, Financial Times, 7 November (2022).

[7] IMF, World Economic Outlook, April 14 (2023).

[8] R. Sharma, ‘Latin America isn’t booming, but that could change’, Financial Times, 21 June (2021).

[9] R. Arezki & A. Mazarei, MENA and the Global Energy Conundrum, (2023), 6.

[10] IMF, Economic Prospects and Policy Challenges for the GCC Countries - 2022, Gulf Cooperation Council, Paper prepared for GCC Ministerial Meeting, October 3 (2022).

This review contains extracts from the Dutch Disease to Energy Transition. It is part of illuminem’s Curated Booklist: the influential books shaping the sustainability debate. illuminem Voices is a democratic space presenting exclusive insights from the world’s largest network of sustainability thought leaders. Their views expressed do not necessarily represent those of illuminem.

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