Monday, March 27, 2006

One good deed leads to Dutch disease

Dutch disease manifests in many forms. Here is the latest incarnation from Zambia (via Mahalanobis).

In short: the debt write-off (under the rubric of the MDG) effectively transfers foreign exchange to Zambia, causing a currency appreciation and hurting exporters.

Earlier I had written about a similar Dutch disease in the Philippines. Now I realize that the latter form is less of a problem than that experienced by Zambia, or other countries afflicted by the "natural resource curse".

The reason is simple: remittances wind up in the hands of private individuals (families back home), who allocate the funds based on market incentives. However in Zambia, the transfers are disposed of by the government; similarly in resouce-driven appreciations, state-owned companies typically get the bulk of the bonanza.

I am very suspicious of government acting as if it were a market entity, when it is actually shielded from market incentives. There is no guarantee that the foreign exchange earnings will be used for the right purpose, whether investing in human development directly (welfare programs and safety nets) or indirectly (investing in profit-making enterprises). So the Zambian government (and other recipients of the MDG debt write-off) better be careful that the long-term gains from their investment more than offset the short-term repercussions of the Dutch Disease.

1 comment:

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