Dutch Disease vs. Nigerian Disease

Prior to the 1980s, it was believed that natural resource abundance would enable developing countries to make the transition from underdevelopment to industrial “take off”, just as it had done for countries such as Australia and the U.S (Rostow, 1961; Stages of Economic Growth). This view now stands challenged by a number of studies that demonstrate the existence of a “resource curse” – slower growth and poorer economic performance in natural resource rich countries.

The traditional explanation for the resource curse is the Dutch Disease or “deindustrialization”. That is, revenue from natural resources hurts traditional manufacturing through an increase in the exchange rate; also, resources such as labor and capital need to be moved from manufacturing to natural resource production. Most studies on the Dutch Disease stop here although the argument is far from complete.

We still need to show that traditional manufacturing offers better growth opportunities than natural resource sectors. Some studies such as Hirschman (1958; The Strategy of Economic Development) and Baldwin (1966; Economic Development and Export Growth: A Study of Northern Rhodesia, 1920-1960) do argue that the relatively small “backward and forward linkages” from natural resource to other sectors limit the growth potential of natural resource rich countries, but the debate is far from settled (also see, Sachs and Warner, 1995).

Recent work suggests another explanation of the resource curse – the Nigerian Disease. That is, an abundance of natural resources leads to poorer governance and conflicts. It gives rise to governments that are less accountable to the people, have little incentive for institution-building, and fail to implement growth enhancing reforms. Higher corruption, more rent-seeking activity, greater civil conflict, and erosion of social capital are some of the outcomes associated with the Nigerian Disease (see, for example, Rosser 2006). While it too early to draw any definitive conclusion on the relevance of the Nigerian Disease, the early results do suggest a possible way out of the resource curse - greater emphasis on institution-building and government accountability.