This post is a follow-up to my recent post on the significant potential for Israel’s recent natural gas discovery to do long-term harm to Israel’s economy. This post draw inspiration from a recent Planet Money podcast – Norway has Advice for Libya – which was in turn based on this very interesting Financial Times article. In that podcast Planet Money’s reporters visited with Farouk al-Kasim, an Iraqi born geologist who was key in advising Norway on the development of its North Sea Oil wealth. Significantly, both Planet Money and the Financial Times assert that Norway may be the only country to date that has not suffered adverse affects due to the natural resource curse.
In addition to my previous discussion about Israel’s potential problems, there is also the problem of so-called “Dutch disease.” Dutch disease occurs when a nation discovers a natural resource which is valuable, that country exploits that resource, and as a result the country’s other industries suffer tremendously. Dutch disease is so-named because of the decline in manufacturing (read other industries) after the Netherlands found a large natural gas field in Groningen province in 1959. Economists theorize that (1) significant natural resources “crowd out” other industries, leading to their contraction and (2) increase the value of the resource-rich country, making its other goods less attractive abroad (because they cost more than its competitors). Let’s make this a real world example:
- Israel finds natural resources and begins exploiting them;
- The value of the NIS (New Israeli Shekel) increases due to currency inflows;
- Israeli manufacturing including high-tech Intel chip becomes less competitive because Israeli products become more expensive elsewhere;
- The most skilled and intelligent people go to work for the high-paying gas industry; and
- Other Israeli industries become even less competitive because of the interaction between 3 and 4.
Planet Money purports that Norway has escaped Dutch disease (as does this article – to an extent), but how? Norway did the following:
- Limited general wage increases;
- Exercised fiscal discipline (pay back debts, establish Petroleum Fund, protect economy from excess demand);
- Developed local ability to develop natural resource;
- Used natural resource money for education, research, and development;
- Used resource rents to counteract recessions;
- Maintained centralized wage negotiation system; and
- Maintained knowledge/expertise in non-natural resource activities.
Query whether Israel is willing and able to enact these significant and important policies to combat the looming resource curse. One thing is certain, if there truly is as much gas in the Leviathan Oil Field as experts project – Israel must at least seriously consider what policy tacks are most appropriate. Israel’s failure to react appropriately to these real risks may harm Israel’s economy as it has other industrialized nations like Australia, Canada, the Netherlands, Ireland, and (perhaps) the United States. Israel’s significantly developed institutions will hopefully prevent at least some of the negative effects of the resource curse, but there are many other advanced countries with highly developed institutions which also suffered from the resource curse.
