The Dutch Disease in Reverse: Iceland's Natural Experiment

For a long time, abundant natural resources brought Iceland a high and volatile real exchange rate with adverse effects on manufacturing and services. During 2003-2008, another national treasure, the sovereign’s AAA rating, was used by privatized banks to attract foreign capital, elevating the real exchange rate even further. The financial collapse and the associated collapse of the currency in 2008 left the country with a large foreign debt which offset some of the effect of the natural resources on the real exchange rate. In effect, this was the Dutch disease in reverse as witnessed, in particular, by a massive increase in the number of tourists following the financial collapse. This paper discusses the behavior of the exchange rate of the Icelandic króna before and after 2008 as well as its relationship to natural resources, capital flows, output, exports and imports, including tourism

Privatization and State Capacity in Postcommunist Society

Economists have used cross-national regression analysis to argue that postcommunist economic failure is the result of inadequate adherence liberal economic policies. Sociologists have relied on case study data to show that postcommunist economic failure is the outcome of too close adherence to liberal policy recommendations, which has led to an erosion of state effectiveness, and thus produced poor economic performance. The present paper advances a version of this statist theory based on a quantitative analysis of mass privatization programs in the postcommunist world. We argue that rapid large-scale privatization creates severe supply and demand shocks for enterprises, thereby inducing firm failure. The resulting erosion of tax revenues leads to a fiscal crisis for the state, and severely weakens its capacity and bureaucratic character. This, in turn, reacts back on the enterprise sector, as the state can no longer support the institutions necessary for the effective functioning of a modern economy, thus resulting in deindustrialization. Using cross-national regression techniques we find that the implementation of mass privatization programs negatively impacts measures of economic growth, state capacity and the security of property rights.http://deepblue.lib.umich.edu/bitstream/2027.42/40192/3/wp806.pd

Finance, foreign (direct) investment, and the Dutch disease: the case of Colombia

In recent years Colombia has grown relatively rapidly, but it has been a biased growth. The energy sector (the locomotora minero-energetica, to use the rhetorical expression of President Juan Manuel Santos) grew much faster than the rest of the economy, while the manufacturing sector registered a negative rate of growth. These are classic symptoms of the well-known ‘Dutch disease’, but our purpose here is not to establish whether the Dutch disease exists or not, but rather to shed some light on the financial viability of several, simultaneous dynamics: (i) the existence of a traditional Dutch Disease being due to a large increase in mining exports and a significant exchange rate appreciation; (ii) a massive increase in foreign direct investment (FDI), particularly in the mining sector; (iii) a rather passive monetary policy, aimed at increasing purchasing power via exchange rate appreciation; (iv) more recently, a large distribution of dividends from Colombia to the rest of the world and the accumulation of mounting financial liabilities. The paper will show that these dynamics constitute a potential danger for the stability of the Colombian economy. Some policy recommendations are also discussed

Oil and gas:a blessing for the few. Hydrocarbons and inequality within regions in Russia

Building on earlier work on regional inequality in Russia the article seeks to demonstrate that the regional oil and gas abundance is associated with high within-region inequality. It provides empirical evidence that hydrocarbons represent one of the leading determinants of an increased gap between rich and poor in the producing regions. The discussion focuses on a possible cluster of geographic, economic and political factors underlying the phenomenon

Exports Under the Flicker of the Northern Lights

Picture a small open economy in the North Atlantic Ocean, highly dependent on trade with the EU and NAFTA. How important are these trading blocs to the country's exports? How important is the country's location and size, and how do these affect the export sectors? A unique version of the gravity model is applied here using an inverse hyperbolic sine function. Typically, the export volume is significantly impacted by the economic size of the exporting country, but in this case it is not. This suggests that the exports from small remote economies are driven by different factors than exports from large conomies