MUCH has been made of the “Dutch Disease” in discussions of Guyanese oil developments lately. It’s become a warning siren about the dangers of creating an economy that relies too heavily on oil.

There is certainly some truth to that, but Dutch Disease is a complex economic concept that needs to be explained and examined rather than just tossed around casually, since economists themselves are far from united on just what it means for countries.
The term “Dutch Disease” was coined in the 1970s to describe a falloff in the Dutch manufacturing industry that coincided with a rise in Dutch natural gas production after major discoveries in the 1950s.

The idea was that huge influxes of cash from fossil fuels had increased the value of the Dutch Guilder (the country’s pre-Euro currency), to the extent that companies in other sectors like agriculture and manufacturing were having trouble exporting their products, because a high- value currency made them too expensive for consumers in other countries.
Economists and the media were also troubled to see that unemployment had increased, and that investment in non-gas sectors had declined.

But it’s easy to see why economists are hesitant to describe this series of issues as an inevitable impact of oil-and-gas production. For one thing, the 1970s was a time of global economic instability, and many industrialised countries, including the U.S., Britain, and France, saw their manufacturing sectors decline as well during this time.

The shock to the Dutch economy also didn’t last long. Today, the Netherlands is the second largest agricultural exporter in the world despite its tiny size, and is a global hub for trade, shipping, and finance, while its gas industry remains strong.

Overall, exports have rebounded to become more than 80 per cent of the Dutch gross domestic product (GDP), and gas plays a relatively minor role in that.

In many ways, an examination of the “Dutch Disease” reflects how important good governance and smart economic policy is when it comes to oil and gas.

To mitigate the “Dutch Disease”, economists have found that the key is to use resource revenue in a responsible way, by saving it in an internationally invested fund with a diverse mix of currencies that will keep wealth safe for future generations; finance efforts to “even out” the impacts of major drops in oil prices; and give a country’s Central Bank the necessary financial leverage to manage their currency’s value.

Slow and steady is the key. Revenues from resource extraction can be invested, but they shouldn’t be scattered wildly. They need to be invested in projects that increase the economic well-being of the country, and the economy as a whole.

Yes, other industries will be navigating a new environment after oil, but oil revenues can and should be invested to help those industries adapt and compete more effectively.
Part of what went wrong in the Netherlands was that investment was happening, but successive governments chose to make those investments mostly in oil and gas, while other industries were neglected.

Paradoxically, the oil revenues themselves are the ticket to avoiding that trap and diversifying the economy. The more oil revenues are invested in sustainable long-term public goals like infrastructure (ports and roads), healthcare (hospitals), and education (schools), the more opportunity all industries will have to thrive.

That’s what countries like Malaysia have successfully done; they took oil money and invested in other sectors like technology and manufacturing to grow their whole economy. Meanwhile, they set themselves up for the future, setting aside a sovereign wealth fund and a development fund and putting money into research and education to build a strong foundation for future industries and businesses.

In the end, the Dutch took a similar route: They invested in high-tech manufacturing and agriculture, cutting-edge research universities and the financial sector, becoming a global centre for all three.

As the country that gave the “Dutch Disease” its name demonstrates, economic dangers are not economic destiny. With proper financial management, conservative spending and smart investments in human capital and diverse industries, Guyana can learn from the mistakes of countries which came before it.

Oil alone is not a goal; the goal is a wealthy and diversified economy that serves all Guyanese, and a government able to provide them with a better education, better healthcare, and better opportunities, for today’s generation and future ones. Managed carefully, oil will help us get there.