Kurdistan’s Dutch Disease

By Dr. Bayad Jamal Ali:

The Kurdistan Regional Government (KRG) and most of the society believe that having oil, and its exploration as well as its export, is vital to economic development. There is no doubt that oil-dependent economies highly rely on this idea, because oil represents the source of obtaining revenue, hard currency, and trade balance. However, we can ask how oil will benefit the economy today, and what will its role be in the future, especially if there are more drops in oil prices? And what economic development and growth have the oil countries, especially the Gulf countries and Iraq and the other oil-dependent economies, achieved compared to countries that have non-oil economies and don’t rely on natural resources?

These questions and many other notions preoccupy a lot of people, especially the Kurds in Iraq, for whom the oil of Iraq became a source of curse and misery, and the oil of Kirkuk became the cause of the displacement of many Kurds from the city which suffered a demographic change under Saddam`s regime. To analyse these ideas, we will take into consideration the notion of the Dutch disease, its historic implications, and its impact on Kurdistan and Iraq, which applies also to many other oil-dependent countries.

The Dutch disease is mainly linked to the discovery of a natural resource, or an increase in foreign direct investment, or any large increase in wealth. This large increase in a country`s revenue can have negative consequences. The main effects of the Dutch disease are an increase in imports, and a decrease in price competitiveness and exports, which negatively impacts on a country`s manufactured goods. Sounds familiar?

So the reader can know the origins of this term, the Dutch disease idea started in the 1960s after a crisis in the Netherlands which was the outcome of massive discoveries of natural gas in the sea. This sudden increase in wealth caused the Dutch guilder to rise, which also resulted in non-oil Dutch products becoming less competitive in the world market. In another case, in the 1970s the British pound lost a lot of its value, the country fell into recession, exports became less competitive, and Britain turned into a net exporter of oil where previously it had been a net oil importer. These were consequences of the massive increase in oil prices during the Arab – Israeli war which made oil drilling off the coast of Scotland more feasible economically.

Kurdistan is a special case in this regard: it not only has the Dutch disease, but also suffers many symptoms reflected in a waste of many resources and inability to create an infrastructure that would support economic development. The factors preventing this necessary development are the failure of current economic policies, misuse of power in managing the government’s revenue and lack of initiatives to craft new economic policies.

The reason behind diagnosing such diseases is not just to criticize the KRG, but also to learn from the experiences of other countries so that we can better comprehend what the region faces. In the past decade, massive amounts of wealth entered the Kurdish economy from the central government of Iraq and other sources, creating the Dutch disease; to add to this the export of oil revenues might worsen the disease, if we do not find a cure and act soon and, if the Kurdistan’s budget and liquidity problems continue while oil prices keep falling, we may reach the point where we become totally broke and default on our debts.