Graphics courtesy of the World Bank

The world looks with a bit of bewilderment at the plight of modern Russia, a nation with more land mass and likely more resources than any other country in the world, a vast intellectual heritage that has placed it in the top echelons of some of the most important scientific fields, and which contains fascinating cultures that have inspired the planet over the decades and centuries. And, yet, its economy languishes and it is prone to autocracy. Perhaps it suffers from the Dutch Disease. 

That term means no insult to the Dutch. Instead, it describes a phenomenon that happens when one is seemingly blessed with too much. The phenomenon is at first counterintuitive, but it makes sense once you think about it. 

Natalie and I were appreciating life the other day and we both agreed that, were we to win the lottery, our lives would change little. We might have more to donate to help those less fortunate and pets that have been abandoned, or promote sustainability, but we don’t believe a lottery is a blessing. In fact, when interviewed years after people win the lottery, they more often than not reveal they become less happy. Financial complacency replaces the hard work that makes we humans proud for days well-spent, and those who are outwardly wealthy are no doubt bombarded with demands from people who want some of their wealth. 

The Dutch Disease is a bit different than that, but for some of the same reasons. 

The Dutch are aa a relatively small population of hard working and industrious people who forged an existence with few visible resources. The “never-lands”, or low-lands, is a small nation across the North Sea from England, with an average elevation of 100 feet and a highest point of 1000 feet. A third of the nation is below sea level, with farms and factories protected by dams and tidal barriers. It has the second highest population density in Europe, and 16th highest in the world. It is also ranked the fifth most competitive economy worldwide, and has the oldest stock exchange. 

It has succeeded because it is incredibly democratic. I don’t mean that in the political sense. In fact, it seems a reach to argue that democracy as we know it in the 21st century is anything like democracy as we imagine it, and as practiced by the Dutch. There, democracy is incredibly inclusive and brings out the best of people. Eighty percent of people vote in their congressional elections. Various stakeholders, especially employer and employee groups are consulted and play important roles in the development of new policies. The politics are stable and effective, and not prone to partisanship and divisiveness, despite a high degree of tolerance for different and sometimes even radical ideas. 

The Dutch were great navigators in the Age of Discovery, and have remained a trading nation. They enjoyed a highly educated workforce and they appreciated a high level of productivity - until the Dutch Disease. 

In the 1950s, vast tracts of natural gas were discovered in their exclusive economic zones, both inland and offshore. To develop the fields, the government brought in large multinational energy companies such as Exxon Mobil. A mammoth new and energy sector was created, with the highest paying jobs going to executives and ex-patriots associated with the home nations of the oil companies. Royalties flowed to the Dutch people, but only net of all other costs borne, much of which were diverted to the energy companies themselves.

There were also a lot of reasonably well paying but relatively low skill jobs created that diverted some of the labor force away from industry and the education necessary for more highly skilled jobs. These challenges would require accommodations within any economy. But, they were not even the biggest problem. 

There was no way that the Dutch economy would absorb the huge resource supply domestically. Most all resource industries are export oriented, and this industry was massive. It resulted in huge demand for the Dutch guilder, which pushed their exchange rate so high that the traditional industrial sector which fed their exports was no longer able to compete internationally. The industrial and trade sectors declined significantly. 

Meanwhile, the royalties flowing through the nation created some new affluence and complacency, but many jobs were lost, and perhaps motivation as well. The government’s coffers were full, and they used those funds to create more service sector employment, at a lower wage and much lower productivity than the industrial jobs that were lost. The traditional export sector was being replaced by non-export jobs, which likely even worsened imports. 

After a few years, the Dutch and world learned that they were actually worse off from a boon in resources and affluence. Studies of the Dutch Disease have demonstrated that exchange rates rise, education and employment fall, corruption and bribery worsen, and governments move from democratic to autocratic. Likely, too, initiative and innovation is sapped, and national pride suffers. Economic growth falters, and so does the international prestige borne of innovation, trade in high technology goods, and economic dynamism. 

The Dutch have realized that a blessing is perhaps a curse, and has since been weaning themselves off of export-oriented resource extraction. They initiated a public and inclusive dialog over the need to transition to carbon neutrality, and are becoming world leaders in sustainable energy, especially from giant windmills, naturally enough. 

Perhaps the Russians too will wean themselves off of the reliance on resources and all the oligarchs and corruption that foments. As global warming makes even more resources developable in Russia and Canada both, the Dutch Disease offers a cautionary tale. Despite its immense resource endowments, Canada seems determined to fuel its growth on the immigration of skilled workers thirsty to be afforded an opportunity to succeed. That nation is now accepting about 2% of its population in immigration each year, and with one in four Canadian residents having arrived from another nation. Meanwhile, Russia’s immigration rate is less than 0.1%. 

Perhaps that is the best indicator of economic well-being - the degree to which people vote with their feet.