Business World, 16 January 2012


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, anyway, for a people reputed 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 “natural-resource” curse. But “Dutch Disease” is the name that stuck.

The term however 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 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 unheard-of explosion in prices, since known as the “Price Revolution”. The Dutch ultimately recovered from 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.