Nature, Economic Growth and the Dutch Disease

By: Bikal Dhungel

In a previous article, we talked about the impact of economic growth on environment. That was about how the increase in human welfare in terms of wealth has affected the environment we live in. In this article I will take nature, or the environment as a factor that contributes to economic growth. Nature here means either the natural resources or the geography. So, the first question arises, how does geography determine economic growth ? What is the role of geography in economic growth ?

First of all let us find the differences between the environment and geography of countries or region that are rich and those that are poor. Taking an example of Europe, 90% countries have an access to the sea. The temperature is favourable for agriculture. There is enough rainfall. There is no complex geography. There are many navigable rivers. Source of energy, coal, is in plenty and so on. These characteristics play important role to drive economic growth and to sustain it. Having an access to the sea is probably the most important among these characteristics. It was empirically proved that countries with an access to sea involve in international trade in a greater degree and trade is important for economic growth. For this reason, places that are rich are mostly near the sea. Scientific papers on economic growth have frequently mentioned that proximity to the sea explains why there was a rapid economic progress. A paper by Sachs, Gallup and Mallinger mentions an important information that only 17.4% of world's landmass is located within 100 km from an ocean but 50% of world population live there and 68% of total world GDP is produced there. In the contrary, many of the poorest countries in the world do not have access to the sea or at least not in a condition to make it a port. Access to the sea is correlated with higher GDP. Moreover, having an access to the sea also reduces the transportation cost of goods, and this again boost consumption and contribute to growth. In the US and Western Europe for example average transportation cost for goods account less than 5% whereas in sub-Saharan Africa and south Asia, it goes well beyond 20%. Another factor that plays a role within the geography is climate. There are 12 climate zones in the world. Three of them, tropical, sub-tropical and temperate are where most countries are located. Climate is important because humans are by nature tropical creatures. Only after the development of clothing and better housing, we were able to settle in colder regions in the last thousands of years. Similarly, humans also could not survive in hot regions. Climate matters because our agriculture depends on it and we all know that largest part of the world still rely on subsistence farming and the origin of all human foods goes back to agriculture. In poorest regions, sub-Saharan Africa and south Asia, about 60% agriculture comprises about 60% of all employment. So, if there is advances in agricultural productivity due to better technology, growth will occur but in the absence, they will continue lagging behind. Agricultural productivity is higher in western Europe and the US, both due to technological advances and better soil quality. Empirical evidences shows that farther the country lies from the equator, richer it is. Equator is an imaginary line drawn exactly in the middle of north and south pole that divides northern and southern hemisphere. With an exception of Singapore, farther the country lies from the equator, more developed it is. However, if we consider agricultural outputs in countries that lie far from the equator, it cannot be concluded that the quality of soil or the temperature alone explains the higher output. Other factors like the amount of land available per worker, technology, human capital and other privileges might play a role as well. There is a famous paper by Gallup in this matter. He concluded that land in wet tropics produces 27% less than land in the wet temperate zone, land in dry tropics produced 31% less than land in the wet temperate zone, and dry temperate zone produced 15% less than land in the wet temperate zone. So, such variabilities in productivity explains why some regions are poor and why some are rich.

Countries and regions also differ with the prevalence of diseases. The rate of spread of disease is different in ice climates than in the tropics. The tropics is also the home of most human diseases, one of them being Malaria, which kills almost a million people in a year and infects other millions. Diseases have negative impact in human lives. Those with disease cannot participate in economic life, they perform worse in the school and are likely to remain in poverty trap. Having a member in a family with a disease will impact the whole family indirectly. So, if a large portion of the population is not healthy or at risk, this will have a huge effect on economic development. This is why countries with high mortality due to Malaria are poorer in comparison with countries without. Being prone to diseases cause poverty and poverty in turn makes people prone to diseases. In the case of Malaria, it also also called the disease of the poor as it is exclusively present in poor tropical countries. The Malaria Ecology Index of the WHO shows that Spain and India are equal in the index but 0% of Spanish are at risk of Malaria whereas 70% of Indians are. The same figure shows that, the higher the index, poorer you are. But here again, having a high index does not automatically mean that you are a poor country. Availability of medical technologies and a good healthcare system will reduce the risk as in the case of Spain. But we can conclude from here that Climate and disease are related and disease and economic development are related. So, climate and development are also related.

Some climates are simply unfavourable for humans unless there is a technology that will kill out the disadvantage. For example, in the middle east, it is impossible to work during the day. The temperature goes beyond 45 degree. But still, large human settlements are being built in UAE, Qatar and other countries. It is possible only because of air condition in the houses. Since the development of air-condition, places that were unlivable before became new homes of humans today. The US has many such places like Las Vegas which were unlivable once but thanks to the technology, it is no more like that. Similarly, the heating system in cold areas allow people to avoid any difficulties due to cold winters. Hence, climate plays an important role in economic growth. Along with the points mentioned above, climate is a determining factor about our capacity to live in a certain place, how long we can work , how favourable is the situation and many more. When climate does not possess constraints, development is possible, otherwise it is difficult.

Let us talk about the natural resources where the term 'Dutch Disease' come to use. The term Dutch Disease was attributed to the Netherlands when natural gas field was discovered there in 1960s. A substantial part of the workforce worked in gas fields and that lead to the decline of industrial sector which was successful at that time. As time went on, Gas became scarce and the labour was not needed. But until then the manufacturing sector had already contracted and people had fewer skills to return to work in production. So, they were worse off and the manufacturing sector suffered due to lower skills of workers and this phenomenon is called Dutch Disease. This can be used in other context when a country for example discovers resources like Gas or Oil or any other natural resources, then a large portion of its population work in that sector. Slowly the resource become scarce or finish but the people have no other skill to do something else. About the connection between natural resource and economic development, I have already written an article called 'Resources: good or bad for poor countries'. But here, what I focus is, natural resource is very important in economic development. If you have an availability of resources you need for production, your reliance on foreign countries will be mitigated. Depending on foreign countries for sensitive resources can put you in danger if there is a shortfall due to political reason. One example of such shortfall was the Oil Crisis in the seventies when oil exporting nations stopped supplying oil to western Europe and the US for their support of Israel. This crisis was called the 'Oil Embargo' and it caused an economic recession to some extent. Ensuring the flow of resources is very important in development. Development itself is resource intensive and the origin of resources is the nature itself.

However, countries that are rich in natural resources are not necessarily well developed countries. Some of them achieved growth based on natural resources like Norway but others got trapped into a deep political conflict mainly due to the availability of natural resources, like the Democratic Republic of Congo or South Sudan. On the other hand, countries that do not posses any useful natural resources are among the most developed countries, examples are Belgium, Singapore or Switzerland. This shows that the role of government plays an important role in ensuring the better use of resources. Norway, with an accountable government was successful in creating an environment so that every citizen profit from the resources whereas countries like Congo, Sudan and Venezuela got trapped into an ethnic violence and preferential politics that ignored people belonging to other clans or ethnicity which resulted in large scale conflict. Countries that do not have any natural resources focused on human capital which in the long term gave a path to technological advances and created competitive advantages, as a result of which they lead highest living standards today.

Hence, having natural resources is neither good nor bad. Only if you can better use this, you are likely to generate economic growth. We should also keep in mind that no matter how advance we are in technological development, the origin of this is the nature itself. So, anything that destroys the nature can hit back in the long term. A successful country makes an intelligent use of natural resources but does not rely fully on it to generate income, otherwise there will be a danger of Dutch Disease as in the Netherlands and elsewhere. Additionally, we conclude that, geographical factors like the access to the sea or navigable rivers that lead to the sea, the temperature of the place, the amount of rainfall, availability of other natural resources, prevalence of diseases and other natural factors played and plays an important role to achieve economic growth and development.