Malaysia catches the Dutch Disease

Global investors are not going to put money into the country if the government does not address the Malaysian resource curse.

Written by William Leong, CPI 

Pump priming: Wrong diagnosis

Prime Minister Najib Tun Razak announced that the government will prime the economy with an additional RM1 billion monthly till the end of 2010 in a bid to bolster the country’s economy.

Unfortunately, allocating RM200 billion under the 2010 budget or pump priming the economy will not return Malaysia to economic competitiveness. Malaysia’s economy was ill long before the sub-prime implosion and the consequent global financial crisis.

Najib Tun Razak will not be able to redress Malaysia’s economic woes unless and until he and the Barisan Nasional government has the honesty and courage to deal with the Malaysian resource curse and have the political will to carry out the necessary fundamental structural reforms.

The Dutch Disease

Malaysia has exhibited the classical symptoms of the ‘Dutch Disease’ or ‘the Resource Curse’. The term “Dutch Disease” was coined in 1977 by the Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959, culminating in the world’s biggest public-private partnership, N.V. Nederlandse Gasunie between Esso (now ExxonMobil) Shell and the Dutch government in 1963 only to see the rest of its economy shrinking.

It refers to the paradox that countries with an abundance of natural resources, specifically resources like minerals and fuels, tend to have less economic growth and worse development than countries with fewer natural resources.

The Dutch resource curse is an economic concept to explain the relationship between the exploitation of natural resources and a decline in the manufacturing sector combined with moral fallout. The concept explains that an increase in revenues from natural resources will de-industrialize a nation’s economy by raising the exchange rate, which makes the manufacturing sector less competitive. It also leads to the public administrators getting entangled with business interests.