Of Dutch Disease and Other Ailments

By
De Meelfabriek
Of Dutch Disease and Other Ailments - Robbert van Eerd

Abstract

In 1959, one of the largest natural gas fields in the world was discovered in the Netherlands. This article describes the impact these reserves have had on the political economy of the Netherlands, and some of the challenges associated with managing the “wealth effect.” Integrating the revenues accrued into the national budget has proven troublesome because of the highly volatile nature of commodity prices. Moreover, the management of the wealth accrued from the reserves has been subject to rent-seeking behaviour, imposing substantial losses on Dutch society. The case of the Netherlands serves as a reminder that rich resource-rich countries stand to lose if the wealth of a natural resource is not treated with the appropriate prudence.

Introduction

The term “resource curse” has been popularized in the last decade, often in relation to developing countries that face sudden influxes of resources, either through the discovery of natural resources or in the form of foreign aid.[1]The curse of natural resources is a notion in international economics that somewhat counter- intuitively theorizes that countries with a great abundance of natural resources tend to grow more slowly than countries without. Empirical studies have shown that this “paradox of plenty” is grounded in fact.[2] It seems that natural resource abundant countries face problems in achieving export-led growth – a path that has helped many other countries on the way to prosperity. The first account of the problem, however, was from a well-established developed country – the Netherlands. The “disease” associated with a large endowment of natural resources and further ailments caused by the mismanagement of this subterranean capital are the topic of this paper.

The Netherlands is blessed with significant natural gas reserves in the northern province of Groningen as well as offshore in the North Sea. But the Dutch case illustrates how this kind of blessing can sometimes be a curse. The first part of the paper will examine the negative effects of the natural gas revenues on the Dutch economy including its impact on manufacturing (the “Dutch disease”) and inflationary pressures. The second part of the paper will elaborate on the expenditure of additional revenues and the “wealth effects” of the Dutch natural gas
reserve. The last 50 years of extraction have represented the wasting of billions of euros in revenues.[3] More than half of all gas has been pumped already, while the remainder will be depleted within one generation. It is therefore important to use the remaining revenues in a sustainable way.

Although this paper focuses on the case of the Netherlands, the argument is relevant for other resource-abundant countries. While the discovery and exploitation of natural resources might initially lead to inflation, other negative effects can manifest decades later, even in a well-established economy. By analyzing the case of the Netherlands, a country that went through the natural resource experience relatively early, other countries can learn how to avoid the negative externalities that are associated with large natural resource endowments.

The Early 1960s: The Discovery of the Groningen Gas Field and the Conversion of the Dutch Economy

The year 1959 saw the first exploratory gas drillings in the Dutch province of Groningen, which would turn out to be one of the largest gas fields in the world.[4] Initially, the recoverable
deposits were estimated to be 50 billion cubic meters. The estimates were repeatedly revised upwards, and by 1963, when the first concessions were granted, it was believed that the total reserve could be as large as 1,100 billion cubic meters.[5] By 1967, estimates stood at 2,200 billion cubic meters (to illustrate how large this volume is, last year’s natural gas consumption in the whole of the Netherlands was about 50 billion cubic meters).[6] It was soon understood that this discovery had major national implications for the Dutch government and a fierce debate arose about how to use the revenues.[7]

The Minister of Finance, the famous Piet Lieftinck, and the Minister of Economic Affairs De Pou, both members of the Partij van de Arbeid (Party of Labor), proposed putting the windfall profits into a “sovereign wealth fund” (SWF).[8] Since the reserve was expected to be depleted within one generation, they thought the creation of a separate fund was justified.

Minister of Finance (and later President of the Dutch Central Bank) Jelle Zijlstra, who later became President of the Dutch Central Bank, was vehemently opposed to the idea of a separate fund, for three reasons. His first argument was ideological. He believed that “political initiatives and their financing should be weighted within the overall framework of the government budget,”[9] and feared that a separate fund would only lead to extra government expenditures.[10] Secondly, Zijlstra thought that the natural gas revenues would be too small to justify the establishment of such a fund. The perceived “impermanence” of the revenues contributed to this argument. In addition, one has to take into account the politico-economical context: energy prices in the early sixties were low and were expected to remain low.[11] Zijlstra simply did not deem the reserves important or large enough to justify a deviation from the normal budgetary procedures. The third reason was political. Zijlstra was concerned that a state fund would be managed by the Ministry of Economic Affairs, and would thereby circumvent the Finance Ministry and its relatively austere rules with respect to additional expenditures.[12]

Zijlstra won the argument. A national fund would not be established until a reversal of the policy in the 1990s. Year after year, revenues became subject to the whims of political parties. In 1962, Communist MP Tjalle Jager set the tone by declaring that, “with that money, once it finally reaches the Treasury, we can do beautiful things: enhance social security of the handicapped and the old, improve the wages of government personnel, and build schools and sport centres.”[13]

The Dutch government promptly set about adopting policies and legislation to adjust to the new economic reality. One of the first acts was the establishment of N.V. Nederlandse Gasunie (Netherlands’ Gas Union plc), the largest public-private partnership in the world. Its shares were divided between the Dutch state (50%), Royal Dutch Shell and ExxonMobil (25% each). The Gasunie was commissioned to exploit the Groninger gas.

Meanwhile the Central Planning Bureau, a key voice in Dutch economic decision-making[14] conducted studies about the optimization of the contribution of the gas revenues to the national income. It concluded that a rapid depletion of the reserves (within one generation) and deep, active market penetration offered the best outcome for the Dutch economy.[15] It was assumed that cheap oil and nuclear energy would soon out-compete gas – hence the emphasis on a quick conversion of the Dutch energy infrastructure to accommodate natural gas. The Aardgas Nota (Natural Gas Note) of 1962 stipulated these findings and with its adoption, the Netherlands committed itself to expending its reserves within 25 to 40 years. Only one year later, Groningen was in production and the first Dutch towns were heated by gas. After another year, the primary pipeline network measured some 500km, supported by over 3,000 km of regional pipelines.[16] The rapid expansion of the network had profound effects on the private sector, households in particular. They adopted central heating and cooking apparatus fueled with gas. Electrical power stations started converting too as industrial boilers were adapted to gas. Lastly, the grid meant cheap power for the chemical industry and other energy-intensive industries.[17] The government had deliberately chosen a low gas price to spearhead the conversion.

The extra investments associated with the process of conversion to a gas-run economy initially led to higher economic growth. The investments caused the energy intensity of the national output (measured in the energy-to-GDP ratio) to shoot up. Efficiency was not a priority for large-scale industry or for household consumers. The development of natural gas also led to a hasty closing of the mines in the southern province of Limburg. In 1963, the operating company De Staatsmijnen or DSM (Dutch State Mines) employed about 50,000 people; ten years later, this number had fallen to about one-tenth of its original size. Unemployment in the region would remain a problem for decades and is still higher than the national average. In the early years, there were three main macroeconomic consequences of the discovery of the natural gas reserves.[18] In the first place, heavy capital investment in the grid and other infrastructure occurred as businesses prepared for a gas-fueled economy, as was mentioned above. Most of the capital goods were imported from abroad, leading to a deteriorating balance of payments. Secondly, the switch to gas created extra economic growth of up to 0.4 per cent per annum, while the wealth-effect of cheap gas (substitutes like oil would have been more expensive) yielded a surplus for domestic consumers. Thirdly, industry expanded as it switched to cheap gas, and energy-intensive industries, such as those producing artificial fertilizers and metal alloys, were established. A positive externality in the switch to gas could be found in the air quality, as burning gas emits fewer particles into the atmosphere than the burning of coal does.

The macroeconomic consequences of the natural gas reserves (the “gas effect”) were mainly positive. However, the positive supply shock provided by cheaper gas prices effectively acted as an unwelcome stimulus package for the Dutch economy, at a time when the economy was already overheating. By the early sixties, the Netherlands had achieved full industrialization and was experiencing strong growth combined with full employment in the labor market and only modest inflation. Soon, the post-war wage consensus broke down as workers laid down high wage claims. Labor’s share of national income increased sharply, but it is argued that the gas effect only had a limited role in the wage explosion.[19] Given the timing of the breakdown – when the extent of the gas reserves was wholly unclear – this argument might not be too far off. Increasing welfare for workers inspired politicians to increase other public (social) services, as part of an overall emerging welfare state. The rising wage and expanding public sector were the first signs of what was to face the Dutch economy later in the decade.

The Late 1960s, Early 1970s: Inflationary Pressures Mounting - Dutch Disease

In the late 1960s, the Dutch economy experienced increasing levels of unemployment. Whereas the previous decades had been characterized by a policy of full employment, the sixties ended with the first signs of structural unemployment, i.e. unemployment independent of the business cycle.[20] The rise in unemployment coincided with the closure of the mines in the province of Limburg. On a national scale, the impact of the loss-making activity of mining was minimal, yet it proved disastrous for the region of South-Limburg. The effect was partly offset by early retirement schemes and by a rebuilding of DSM (Dutch State Mines) into a firm that specialized in chemicals.[21] The revenues from the newfound natural gas resource financed this transformation.

A second characteristic of the Dutch economy in this period was the acceleration of inflation, which originated in part in the international economy, through higher commodity prices. Yet, for the most part the inflation stemmed from the breakdown of the wage consensus earlier in the decade. Gross wage claims continued to drive up prices.[22]

The government and the oil companies, which together controlled Gasunie – the company that had a legal monopoly on the distribution and sale of Groninger gas – agreed to work toward some economy in gas use. They brought up domestic gas prices to the level of world oil prices. This strategy has remained in place ever since. In addition, the State renegotiated the contract with Shell and Esso, and took a greater share of profits from gas, up to 85% above a certain price level.[23] Through the active marketing of natural gas, the Netherlands managed to penetrate foreign markets. Gasunie sold large quantities to companies in neighboring countries for a price that was cheaper than the alternative – oil. Consequently, both the government and the companies participating in the joint venture continued to reap enormous profits.[24] It was in this period that the first signs of “Dutch disease” (see below) emerged. The natural gas revenues started to have a negative impact on both the aforementioned unemployment and inflation. In addition, the gas revenues brought about an “income effect” (or “volume effect,” since prices were still modest.)

The effect on the Dutch balance of payments also became considerable. The Netherlands guilder appreciated, mostly because of the “gas effect.” The regular increase in exports as a result of higher prices for domestically mined raw materials led to a real appreciation of the exchange rate. This appreciation, in which rising prices in one specific industry (natural gas) worsen the competitiveness of other export-focused industries, is known as the “Dutch Disease.”[25] The composition of exports shifts away from manufacturing or services, which ordinarily contributes more to sustainable economic growth.[26] Furthermore, the wage pressure in the primary industry leads to wage pressure in other sectors of the economy. As workers seek out the highest wages, wage demands in the secondary sector need to mirror those in the primary sector (extraction and related industries).[27] The appreciation of the guilder thus had profound effects on the Dutch industrial base.[28] The apparel industry, for example, declined from 60,000 to 20,000 jobs between 1968 and 1978.[29] It was around this time that the government started to support major industries such as textiles, leather, shipbuilding and mining.[30] Industrial policy from 1963 was geared toward supporting these declining industries. The earlier case of the transformation of the state mines into a large chemical company DSM is just one example.[31]

It was clear during this period that the government had not developed a strategy to deal with the impact that natural gas would have on its other industries or on how to manage the revenues. Some of the revenues were usurped by participating extraction companies, while some were used to finance the restructuring of industries. A percentage of the revenues were also used for political goals that had little to do with supporting the economy of the Netherlands. Since gas prices were still low, the revenues and the ability to waste them remained limited, but this would soon change.

The 1970s and 1980s: Oil Crisis, Depression and the Welfare State

The gas contribution to the government budget started to become meaningful only after 1973. Before that time, low prices meant that revenues did not add much to the general budget. The 1973 oil crisis meant a boycott that specifically targeted the United States and the Netherlands, which seriously disrupted markets. OPEC’s subsequent decision to increase oil prices by about 70 percent while cutting back production had profound effects on Western economies.[32] For the Netherlands, the effects were mixed. Since the gas price had been linked to the world oil price, the gas reserves increased in value and the state’s revenues from the sales of gas rose sharply. The Den Uyl government that had come to power the same year was determined to use the extra money to weather the effects of the recession.[33] Den Uyl’s cabinet was an amalgam of progressive parties that, with the exception of the Labor Party, had assumed office for the first time.

During their term, Den Uyl made a clear choice in favor of consuming rather than investing the natural gas revenues.[34] The government was able to construct high-level social infrastructure as it tried to stimulate the economy with Keynesian fiscal policies.[35] These included re-employment plans and social security payments. Nearly 10 percent of public expenditure was financed through the natural gas revenues.[36] Because this ensured that wages and prices remained high, it further undermined the competitiveness of Dutch industry.

Throughout the 1980s, the effects of the Den Uyl policies were felt. In the mid-1980s, for example, social security payments alone totaled 20 percent of GDP. Four out of every five persons employed were collecting some form of benefit![37] Apart from incomes policies and measures taken to keep purchasing power at old levels, the Den Uyl government engaged in industrial policy to stimulate the economy. The supply of cheap energy – gas at reduced prices – stimulated growth in industries such as oil refining, chemicals, steel, aluminum, paper and the intensive horticulture in the greenhouses of the Westland near The Hague.[38]

Opposition parties in Parliament picked up on the dangerous developments set in motion by Den Uyl. The government was accused of squandering the revenues by subsidizing consumption and fueling transfer incomes. “The ratio of tax-to-GDP kept on going up, the budget deficit continued to increase, as did the gas reserves. This was great for Den Uyl, but it did start the explosion of public expenses that we are now still trying to curb,” an opposition MP remarked.[39] Public money was “jubilated” by creating employment at the cost of 100,000 guilder per job and subsidies to community centers and local organizations.[40] To accommodate the de-pillarization and social uproar of the 1960s, Den Uyl used public money to buy off protesting students, to support health care users and those in the public housing system and to enhance the cultural sector.[41]

The wasting of public money on a large scale continued under subsequent governments. The Van Agt-government that followed Den Uyl allowed the government deficit to grow to a record 12 percent of GDP. In 1982, government expenditures equaled more than 55 percent of GDP.[42] The Netherlands had entered a negative wage-price spiral by then, which was only resolved with the Accord of Wassenaar in 1982 that stipulated wage restraints in exchange for more jobs.

Throughout the eighties, the Netherlands remained a large natural gas producer. In 1988, for
example, Dutch gas production totaled 41 percent of the European Community production.[43] The value added of gas production represented a record seven percent of GDP in 1985, but decreased to 3 percent a few years later. Revenues from natural gas as a proportion of total state revenues fell from a high of 17 percent to four percent in 1989, mostly due to failures of OPEC to control the market fully.[44] Clearly, the volatility of natural gas revenues has had and continues to have a major impact on the government’s finances. It is because of this large impact that the Dutch budget is so sensitive to price fluctuations of gas. Trade also had an effect: gas exports peaked in 1985 at 7.7 percent of total exports, while Dutch dependency on imported energy fell from 52 percent in 1970 to a mere 21.6 percent in 1988. The strong impact of gas on the current account balance led to a balance-of-payments surplus for the Netherlands.

Throughout the 1970s and 1980s, energy policy remained an important part of industrial policy. Large consumers of natural gas such as energy-intensive industries enjoyed a substantial discount to keep their costs low.[45] Chemical companies, the steel company Hoogovens and the green houses in Westland are all examples of industries that have flourished because of an active industrial policy.[46] The energy intensity of the economy jumped ahead.[47] The oil crisis made the jump possible, as it hugely increased the government’s revenues. In large part, they were used to finance an ever-expanding welfare state.

The 1990s: The FES Fund and the White Elephants

The year 1995 saw the first reform to the system for allocating revenues. Instead of adding all revenues to the general budget, a special fund was established.[48] The Fonds Economische Structuurversterking (Fund for Economic Structural Reform), or FES Fund, was designed by the cabinet of Prime Minister Lubbers to diminish the effects of the natural gas revenues on the yearly budget.[49] Revenues in the fund were designated for “investment projects of national importance meant to reinforce the economic structure.”[50] Categories of investment include a wide range of areas, such as traffic and transportation, knowledge and innovation, and, since 2007, water management and environmental investment. The Fund is administered by the Ministries of Finance and Economic Affairs. The latter ministry controls a greater part of the Fund, because much of the money ends up in the general budget for infrastructure.

The impact of the Fund was initially limited. For a one-euro increase in gas revenues, 30 cents ended up in the Fund or was used to reduce the national debt. The remaining 70 cents was used for increased government expenditure or to lower taxes. Over the years, however, the Fund has become more important. In the 2000s, it captured about half of all gas revenues.[51] The money available for project financing quadrupled from 24 billion euro in 1998 to almost 100 billion euro in 2002. Ex-post assessments of the projects the Fund invested in show that the money was not well spent however.[52] In 2006, the prestigious Dutch Central Planning Bureau (CPB) conducted a review of the Fund’s investments. Its findings were alarming. Of the 49 projects that were surveyed, only 14 showed favorable or satisfactory results. Fifteen projects showed no clear results, and 20 showed clearly unfavorable results.[53] Overall, most projects contributed very little, if anything, to the overall health and wealth of the Dutch economy.[54] The “structural investments” aimed at achieving long-term profitability appeared to stimulate consumption more than investment – the majority of the money was simply spent,[55] and was occasionally “borrowed” by government to satisfy political demands.[56] If the Fund was designed to engage in rent-seeking activities, it clearly failed.[57]

The Fund became particularly notorious for its investment in so-called “white elephants,” all of which were highlyunprofitable. Examples include large infrastructure projects such as the high-speed railway connecting Amsterdam to Brussels, to the European high-speed railway network and the Betuwe Line freight railway linking the port of Rotterdam to the German hinterland. In both cases, the costs of the project have escalated over the years.[58] In the case of the Betuwe Line, the costs ended up twice as high as originally budgeted, at an additional cost of 2.4 billon euro. These infrastructure projects were both financed from the Fund.[59]

In recent years, criticism of the way FES funds have been allocated has increased. The disbursal of money to “infrastructure” or “innovation” is based on vague criteria. Ex post accountability is minimal and cryptic.[60] The Advisory Council for Science and Technology Policy (Adviesraad voor het Wetenschaps- en Technologiebeleid), the Council of Economic Advisors, the Court of Audits and the “Innovation Platform” all acknowledge that the FES Fund has wasted money.[61] Former Secretary-General of Economic Affairs Van Wijnbergen has also acknowledged the failures of the Fund, and has criticized the government for using unexpected revenues to finance additional expenditures.[62] Calculations show that a mere 15 percent of funds allotted ended up going towards infrastructure projects.[63] It is clear that plans to invest in infrastructure (the idea of transforming subterranean capital – the gas – into capital above the ground) have failed.[64]

2000s – Halfway in a Sustainable Way?

By the 2000s there had been over 50 years of gas exploration in Groningen province.[65] New plans for offshore drilling at the Dutch Wadden Sea – a World Heritage site – were drafted. A commission had advised the government to allow drilling in the Wadden Sea, even though this would harm the environment.[66] As had become common practice, the Commission suggested the allocation of about 10 percent of the total expected revenues – 800 million euros – for the protection of some of the area.[67]

Some, like Professor Scholtens from the University of Groningen were highly critical of the drilling plans and of the way in which the government had been managing the revenues. Others sought ways to benefit from the new drilling plans. Environmental organizations pleaded to use part of the revenues for long overdue ecological investments in the Wadden Sea;[68] members of parliament and the government asked to use the money to restructure and/or compensate the cockle fisher fleet whose activities were no longer allowed under new European legislation.[69] In the end, the Minister of Finance agreed to compensate the fishing sector.[70]

Other concerns with respect to economic policy have risen, especially with regard to demographics. Since the Dutch population is aging rapidly, many are concerned that the cost to the budget will eventually become unaffordable. The ratio of workers-to-pensioners will be too small, i.e. there are too few workers to pay for the rising number of pensioners and their escalating health care costs. If the Netherlands had had a sovereign wealth fund, the effects of the aging population could have been mitigated for at least a generation after the country runs out of natural gas.[71]Several studies have run scenarios and based on the outcome have suggested that the natural gas revenues be used to finance the costs of an ageing population.[72]

Similarly, the Dutch Central Bank (De Nederlandsche Bank, hereafter: DNB) did a study and published a report advocating for a separate fund for the natural gas revenues.[73] The report outlined three ways in which the remaining gas wealth could be used, for: 1) investment; 2) the creation of a Dutch Sovereign Wealth Fund or 3) the reduction of public debt, which has reached record levels since the state implemented a rescue package to mitigate the effects of the 2008 financial crisis.[74]

The report also stressed that a fund could help counter the high volatility associated with commodity prices. Rising oil prices boosted income from natural gas extraction, effectively doubling the sector’s contribution to the national economy since the year 2000 to 2.1 percent of GDP in 2008.[75] This totaled to an incredible sum of 13.5 billion, or 9.2 percent of state revenues.[76] Although this share is smaller than other, more notorious cases of resource-rich economies like Russia, Venezuela and some African states, its effect should not be underestimated. Fluctuations in gas reserve revenues of 0.5% of GDP cannot be neglected when compared to the usual fluctuations in the budget balance.[77] The figure above illustrates the increase in the natural gas revenues in the last ten years (left axis, billion euro revenues). The blue line shows that the gas revenues make up an ever-growing percentage of total state revenues.[78] Another problem associated with the management of natural wealth is that of optimization of inter-temporal consumption allocation. Because revenues are exhaustive and volatile, spending (consumption) will also be volatile, making redistribution between generations difficult.

Finally, the DNB recommended keeping the capital fixed, and using just the returns on the revenues,[79] instead of “magically” adding large amounts of revenue to the general budget every year. In this way, extraction is just a transformation of subterranean capital to financial wealth.[80] Currently the FES funds prevents this, as the revenues are mostly consumed.

Counterarguments to a complete separation have centered around the perceived trade-off between a financial form of wealth preservation (the Fund) and actual investments in the real economy.[81] Restrictions would be too severe, resulting in money only ending up in the Fund rather than being allocated to major public investment projects. The aforementioned examples have shown, however, that politicians were not always able to correctly assess the uncertainties and risks related to projects. At other times, politicians carefully ignored economic theory to support coalition governments or specific interest groups (cf. the Wadden environmental organizations.) Both resulted into the financing of projects that were insufficiently profitable, a finding confirmed by the DNB.[82]

The government at the time, a “grand coalition” of Christian-Democrats (CDA), Social Democrats (Labor - PvdA) and a smaller Christian party, gave the DNB report a lukewarm response.[83] The Ministers of Economics and of Finance were particularly eager to dismiss the suggestions of the report. Finance Minister Bos (PvdA) stated that he “favored investments in higher education and sustainable energy over civil servants speculating with public money [from a State Fund] at the stock market,” while Minister Van der Hoeven (Economic Affairs, CDA) said she thought her own plans were better (the Ministry of Economic Affairs controls the FES fund.)

It is very unfortunate for the Dutch that the proposal of the Central Bank was not more warmly received. As Milton Friedman acknowledged, only a real crisis – actual or perceived – produces real change.[84] At the beginning of this year, the Netherlands was chastised by the European Commission. Its Quarterly Report on the Euro Area states that the Netherlands will have to curb expenditures, since it faces “a very significant rise in age-related expenditure over the long term.”[85] The Commission placed the Netherlands in the same list of high- risk countries, such as Portugal, Italy, Greece and Spain, and judged that the status quo is unsustainable. The report caused quite the uproar in the Netherlands, but its findings are not surprising. Under the current government, the national debt grew by 33 percent in 2008, as it fought the recession and implemented rescue operations for the banks.[86] With the exception of Ireland, there was no other European country where the debt increased by such an amount – 87 billion Euros in one year. In the coming years, the Netherlands will have to pay about 13 billion Euros each year just to service the interest on its debts, which is about the same as what was accrued from gas revenues in 2008.[87] In 2009, the situation was even worse. GDP shrank by 4 percent, which is the worst drop in total output in recent economic history and even deeper than the drop at the height of the Great Depression in 1931. The current economic crisis may be sufficiently bad to induce change, as predicted by Friedman. Elections will occur at the beginning of this summer. Ideas for an alternative management of the natural resource wealth are ready and available, but it remains to be seen whether they will be promoted by political parties.

Conclusion

In a recent essay in Foreign Policy, journalist Thomas L. Friedman postulated “The First Law of Petropolitics.” It posited that “the price of oil and the pace of freedom always movein opposite directions in oil-rich petrolist states.”[88] The article argues that there are several reasons why the democratic process of oil-rich states (or natural gas-rich states for that matter) is hampered, including a “spending effect” that leads to greater patronage spending. Friedman finds that there is a strong correlation between the oil price and the incidence of antidemocratic policies in a country. As the natural gas price is linked to the world oil price, we can infer that the same law applies to countries with an abundance of natural gas. Friedman, however, excludes countries like Norway, Britain, and the United States because they “were well-established states, with solid democratic institutions and diversified economies before their oil was discovered.”[89]

Unfortunately, as demonstrated in this paper the effects of natural gas reserves are able to corrupt the systems of even advanced economies. The Netherlands has used its natural gas reserves to build an extensive welfare state and initiate grand projects, without having to worry about an appropriate financing mechanism; politicians have not been able to resist the temptation of spending money for which little accountability was required. The 1990s saw the creation of a special Fund for a better distribution of revenues, but as was proven, these attempts have largely failed. Money went toward typical white elephant investments including huge infrastructure projects, and in other cases was not even invested but just spent.

The evidence provided suggests that Friedman and others have too easily assumed that it is only developing countries, which lack the appropriate institutions that are at risk of mishandling funds generated from natural resource reserves. The risks and responsibilities that come with rich natural deposits should be well understood so as to avoid the mistakes that have been made in the Netherlands. With an aging population, the Netherlands will have to address the financing of its welfare state. After having enjoyed such generous benefits for so long, the adjustment process toward a sound, long-run fiscal balance will be tough.

Notes & References

  1. Paul Collier, The Bottom Billion. Why the Poorest Countries Are Failing and What Can Be Done About It(Oxford: Oxford University Press, 2007), p. 38-44.
  2. Jeffrey Sachs and Andrew Warner, The curse of natural resources (European Economic Review, 2001): p. 837.
  3. Volkskrant, “Miljoenen uit aardgas mogelijk in bodemloze put gestort,” 13 June 2006, http://www.volkskrant.nl/ economie/article319307.ece/Miljoenen_uit_aardgas_mogelijk_in_bodemloze_put_gestort; and NRC Handelsblad, “Feest: 50 jaar boven onze stand geleeft dankzij Slochteren. Hoe Nederland de honderden miljarden aan aardgasbaten verjubelde, en nog aldoor verjubelt,” 12 June 2009, http://www.nrc.nl/achtergrond/ article2270065.ece/Feest_50_ jaar_boven_onze_stand_geleefd_dankzij_Slochteren.
  4. Ibid. The beet farmer on whose land this took place, Kees Boon, never saw much of this wealth. An American journalist who interviewed Boon expected to meet a Dutch version of Rockefeller, yet Boon received less than 1,000 in today’s prices. The Napoleonic Mining Act of 1810 granted subterranean natural resources to the State, which has proven extremely lucrative.
  5. R.F.M. Lubbers and C. Lemckert, “The Influence of Natural Gas on the Dutch Economy” in The Economy and Politics of the Netherlands since 1945, edited by R. Griffiths (The Hague: Martinus Nijhoff, 1980), p. 87-88.
  6. CIA World Factbook
  7. Lubbers and Lemckert, op cit., p. 88.
  8. Ibid. an W. Boonstra, “Aardgasbaten inzetten voor vergrijzing,” Economische Statistische Berichten, 2008, http://www.kennislink.nl/publicaties/aardgasbaten-inzetten-voor-vergrijzing.
  9. Lubbers and Lemckert, op. cit., p. 105.
  10. Vrijdenker, “Dutch disease en hoe Nederland de gasbaten verkwanselde,” 2009, http://wetenschap.infonu.nl/onderzoek/37792-dutch-disease-en-hoe-nederland-de-gasbaten-verkwanselde.html.
  11. Rabobank op. cit. p. 3.
  12. Boonstra op. cit.
  13. Gas in beeld, “De geschiedenis en toekomst van het aardgas in Nederland,” 2009,
  14. Peter J. Katzenstein, Small States in World Markets: Industrial Policy in Europe (Ithaca: Cornell University Press, 1985), p. 61.
  15. P. de Wolff, quoted in Lubbers and Lemckert, op. cit., p. 88.
  16. Gas in beeld, op. cit.
  17. Lubbers and Lemckert, op. cit. p. 90.
  18. Ibid., p. 92-3.
  19. Ibid., p. 94.
  20. Ibid., p. 94.
  21. Ibid., p. 95-6.
  22. Ibid. p. 97.
  23. Ibid., p. 98.
  24. Jan L. van Zanden, The Economic History of the Netherlands 1914-1995. A small open economy in the ‘long’ twentieth century (London: Routledge, 1998), p. 168.
  25. T. Gylfason and G. Zoega, “Natural Resources and Economic Growth: The Role of Investment” (2001), http://www.ems.bbk.ac.uk/faculty/zoega/research/Natinvest31.PDF, p.7.
  26. Ibid.
  27. Ibid.
  28. Van Zanden, op. cit., p. 145.
  29. Katzenstein, op. cit., p. 58.
  30. Van Zanden, op. cit., p. 144; Katzenstein, op. cit., p. 65.
  31. Van Zanden, op. cit. p. 144.
  32. J.J De Jong, “Dertig Jaar Nederlands Energiebeleid. Van Bonzen, Polders en Markten naar Brussel zonder Koolstof,” Clingendael International Energy Programme 02/2005, p. 72.
  33. Vrijdenker, op. cit.
  34. Lubbers and Lemckert, op. cit. p. 104; NRC Handelsblad, “Heeft Nederland de aardgasbaten goed besteed?” 13 June 2009, http://weblogs.nrc.nl/discussie/2009/06/13/heeft-nederland-de-aardgasbaten-goed-besteed/.
  35. McMahon, op. cit. p. 105.
  36. Vrijdenker, op. cit.
  37. Fred McMahon, “Road to Growth. How Lagging Economies Became Prosperous,” Atlantic Institute for Market Studies (Halifax: Nova Scotia, 2000), http://www.aims.ca/library/book_roadtogrowth_chapter3.pdf, p. 106.
  38. L.J.R. Scholtens, “Aardgasbaten verstoren de economische ontwikkeling,” Economische Statistische Berichten, No. 4431 (2004): p. 174.
  39. Andere Tijden, “Aardgas als smeerolie” VPRO, 2006, http://geschiedenis.vpro.nl/programmas/2899536/afleveringen/25899792/.
  40. Terlouw as quoted in Tijden, op. cit.
  41. De Kam, op. cit.
  42. McMahon, op. cit. p. 106.
  43. European Commission, “Country Studies – The Netherlands,” Economic Papers No.81, Directorate General for Economic and Financial Affairs (1990).
  44. Tijden, op. cit.
  45. De Jong,op. cit. p. 205.
  46. N.G. Ketting as quoted in De Jong op. cit., p. 417.
  47. De Kam op. cit.
  48. “Wet Fonds Economische Structuurversterking,” 1995, http://www.stab.nl/wetten/0495_Wet_Fonds_economisch_estructuurversterking.htm.
  49. Andere tijden op. cit.
  50. P. Wierts and G. Schotten, “Dutch Natural Gas Revenues and Fiscal Policy: Theory versus Practice,”Occasional Studies Vol.6/No.5. De Nederlandsche Bank (2008), http://www.dnb.nl/en/binaries/OS6_tcm47-215137.pdf, p. 12.
  51. Tijden, op. cit.
  52. H. Priemus, “Een nieuwe koers voor het ices-beleid,” Economische Statistische Berichten, No. 4384 (2002): p. 826. The share of A-category rated projects diminished from 21 to 10% of total, while the share of weak, C-category projects increased sharply from 19% to 45%.
  53. Annemiek Verrips, “Beoordeling projecten ruimtelijke economie, innovatie, en onderwijs. Analyse ten behoeve van FES-meevaller,” Centraal Planbureau, 2006, http://www.cpb.nl/nl/pub/cpbreeksen/document/130/doc130.pdf.
  54. K. Koedijk, “Afscheid van FES?,” Tijdschrift voor Openbare Financiën, Vol. 41, No.1. (2009). http://tvof.nl/ page/downloads/TvOF_2009-n1-art3.pdf.
  55. Ibid.
  56. Wierts and Schotten, op. cit. p. 12-3; A.P Ros, “De historie van het Fonds Economische Structuurversterking,” Tijdschrift voor Openbare Financiën 2009-1, Wim Drees Stichting voor Openbare Financiën, http://media.leidenuniv.nl/legacy/ar-2009-01.pdf, p. 11.
  57. Volkskrant, “Het gasgeld hoort inderdaad in een permanent fonds,” 30 August 2008, http://extra.volkskrant.nl/opinie/artikel/show/id/1299/Het_gasgeld_hoort_inderdaad_in_een_permanent_fonds.
  58. Ros, op. cit., p. 11.
  59. Vrijdenker, op. cit.
  60. Volkskrant 2006, op. cit.
  61. Ibid.
  62. S.J.G. van Wijnbergen , “Een nota met bloedarmoede,” Economische Statistische Berichten, No. 4272 (2000): p. 736.
  63. Vrijdenker, op. cit.
  64. Ros, op. cit., p. 3.
  65. Andere tijden op. cit.
  66. Scholtens, op. cit.
  67. Adviesgroep Waddenzeebeleid, “Ruimte voor de Wadden,” (2004), http://www.waddenzee.nl/fileadmin/content/Dossiers/Overheid/pdf/Meijer_rapport.pdf.
  68. A. Schreuder, “Waddengas mag, maar met de hand aan de kraan,” Instituut voor Milieu- en Systeemanalyse Amsterdam (2004). http://www.imsa.nl/Publicaties____pagina26_60.html?PHPSESSID=db30c4e51f6d3265d7aa3e3ccddd90bb.
  69. Volkskrant, “Miljoenen uit aardgas mogelijk in bodemloze put gestort” (13 June 2006), http://www.volkskrant.nl/economie/article319307.ece/Miljoenen_uit_aardgas_mogelijk_in_bodemloze_put_gestort.
  70. Ibid.
  71. Boonstra, op. cit.
  72. Ibid.
  73. Wierts and Schotten, op. cit. p. 22.
  74. NRC Handelsblad, “Dutch national debt reaches record level,” 19 November 2008, http://www.nrc.nl/
    international/article2065956.ece/Dutch_national_debt_reaches_record_level. 
  75. Wierts and Schotten, op. cit., p 7.
  76. Centraal Bureau voor de Statistiek, “Aardgasbaten stuwen Rijksinkomsten in 2008,” 30 November 2009, http://www.cbs.nl/nl-NL/menu/themas/overheid-politiek/publicaties/artikelen/archief/2009/2009-2979-wm.htm.
  77. Ibid, p. 20.
  78. Centraal Bureau voor the Statistiek, “Overheid profiteert van sterke stijging opbrengsten uit olie- en gaswinning,” 21 April 2008.
  79. Wierts and Schotten, op. cit., p. 9.
  80. Ibid.
  81. Ibid.
  82. Ibid..
  83. Vrijdenker, op. cit.
  84. Milton Friedman, Capitalism and Freedom, (Chicago: University of Chicago Press, 1962), p. ix.
  85. European Commission, ‘Quarterly Report on the Euro Area.’ Vol.8. No 4. (2009). Directorate-General for Economic and Financial Affairs, http://ec.europa.eu/economy_finance/publications/publication16507_en.pdf. p. 62.
  86. Elsevier, “Bos laat staatsschuld met 87 miljard oplopen,” 23 April 2009, http://www.elsevier.nl/web/10231581/ Dossiers/De-economische-crisis/Nederland-in-recessie/Bos-laat-staatsschuld-met-87-miljard-oplopen.htm.
  87. Ibid.
  88. Thomas L. Friedman, “The First Law of Petropolitics,” Foreign Policy, No. 154 (2006), pp. 28-36 and 31.
  89. Ibid.
Robbert van Eerd is an M.A. student at the Johns Hopkins University SAIS Bologna Center. He graduated cum laude from University College Utrecht in Utrecht, the Netherlands, and spent a semester abroad at the University of New Hampshire in the United States and in East-Africa as part of his degree.