Most of you know, that one of the books that has shape my views has been “Age of Turbulence” by Alan Greenspan together with “Capitalism & Freedom” by Milton Friedman.
One of the subjects that stroke me the most from Alan Greenspan’s book was the “Dutch Disease”. According to Greenspan the term was coined by The Economist in the 1970s “to describe the travails of manufacturers in the Netherlands after the discovery there of natural gas. Dutch disease strikes when foreign demand for an export drives up the exchange value of the exporting country’s currency. This increase in the currency’s value makes the nation’s other export products less competitive.
“Paradoxically, most analysts conclude that, particularly in developing countries, natural-resource bonanzas tend to reduce rather than enhance living standards.” Greenspan .257
Like always I like to dig in into concepts and opinions. I will add to Mr. Greenspan concept that is also an after effect of the “Dutch disease”, the diversification of the economy. When any country not just developing countries experience a bonanza on certain industry it tend to shifted the whole economy towards that industry, making the others less attractive. I mention yesterday the case of Pittsburgh, but they are many countries that have experience this, one of them is Cuba. This Caribbean Island was ask by the former URSSR of big production of sugar cane, the bonanza for the sugar cane in the 80’s was beyond real, but once URSSR collapse , Cuba pretty much lost their only market, things got ugly, and I believe is the same scenario that we are living right now with the numerous countries which their main production is Oil such as Saudi Arabia, Iran, Venezuela, and Russia. They go as far as planning their national budget base on certain average price of oil through year, but once Oil price collapse like they did last fall, things get ugly for the lack of diversification in the economy.
This is one of the main reasons why United States have such a strong economy, although we are shifting towards a consumption economy, we still produce commodities, cars, computers, software, airplanes, and others, and as long as the dollar is the standard currency United States will be the first power of the world, and regardless of the collapse of certain industries such as auto industry and the real estate bubble bursting, the American economy is fundamentally strong.
When I said fundamentally strong, I am not saying we are getting better any time soon, but I believe new ideas with come through time catalyst by the greatest system of all, capitalism with free markets, but this won’t happened until government take their hands out of their way, and let the markets work with modest regulation.