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Catching Dutch Disease – Has Kenya taken the antidote?

In 1977, the Dutch fell in love. Hook, line, and sinker blinded, bedeviled and bamboozled in love. So deep was this love, that their first love – for the Dutch had loved another – was abandoned. This new love was a jealous lover. It craved all the attention, and resources the Dutch had to give. This new love was natural gas.

In 1977, the Dutch fell in love. Hook, line, and sinker blinded, bedeviled and bamboozled in love. So deep was this love, that their first love – for the Dutch had loved another – was abandoned. This new love was a jealous lover. It craved all the attention, and resources the Dutch had to give. This new love was natural gas.

All other domestic industries suffered. No money was going to support their growth. While natural gas exports were all-stars, raking in huge sums for the country, a look inside the country told a different story. Unemployment was skyrocketing from 1.1% to 5.1% as industries collapsed. The foreign currency grew strong making Dutch goods unattractive to export because they were so expensive. The market for Dutch goods plummeted.

So what did the Dutch do? Well, they didn’t want the guilder -then the Dutch currency continuing to get too strong. So they reduced interest rates to increase the supply of money. But as an investor, who wants to invest in a country giving low interest in the market? No one. So now no one was investing in the Netherlands. Maybe that’s when it became known as the Netherlands.

So why this random story? Because I want you to think about this story as we tell the tale of Kenya.

Kenya has just exported its first shipment of about 200,000 barrels of crude oil, officially entering the league of oil-producing countries. Yet, like the Netherlands, Kenya has cornerstone industries such as horticulture, tourism, and manufacturing. If Kenya took to oil the way the Dutch took natural gas, we too may start seeing our industries plummet.

The cautionary tale – a phenomenon is known as Dutch Disease – should be instructive to Kenya. We should be happy that we have oil, yes. But don’t forget the industries that have always been there for us and that continues to sustain our economy. They maintain our status as a productive economy, providing jobs, and diversifying from shocks. Because Kenya is cash-strapped with a budget deficit of 6.3% (in 18/19), one may think that we can just use splash these funds into the economy. Doing this without a plan, as indicated above, is very dangerous.

The funds earned from the sale of oil could be kept in a fund to say, pay for our debts, or invest abroad to avoid overheating the economy. A fund would help phase revenues from oil into the Kenyan economy.

The stories of Dutch disease have hit so many economies – Venezuela, Zimbabwe, Sudan, even Canada, Russia, and the UK have fallen prey. We should exercise caution and learn from others’ mistakes.

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