Solutions for the Disruptive Effects of the Dutch Disease

It is clear that the public authority should take some precautions against possible negativities of the natural resource richness, especially the negative consequences of Dutch disease Dutch disease. It affects the formation of natural resource wealth with good policies to be implemented.

Norway, which is the world's leading oil exporter, is the most distinctive example in this regard.

Norway's oil wealth has become a joint property right legally, and the government has chosen to collect about 80% of its oil gains through taxes and fees. With a kind of expropriation practice in oil revenues, the Norwegian government has invested oil revenues in foreign assets to split oil revenues between the current generation and the next generation. Contrary to what was done in other countries, Norwegians directed their oil revenues in a way not to neglect education and within this framework, they increased the public share in high school and higher education from 26% in 1980 to 62% in 1997. At this point, as a result of the measures and practices taken on the Norwegian Krone, the share of Norway's oil exports in total exports remained below the level when oil was first discovered.¹⁶ Structural changes are also inevitable due to establishing economic stability. In addition, through privatization and restructuring, non-tradable sectors will be supported and resources will be channeled to the training of the workforce. In addition to supporting traditional export sectors, policy implementations such as increasing diversity in order to reduce vulnerability in exports, reducing dependence on the rapidly growing new sector and

15 Alexeev, M., and Weber, S. (Eds.). (2013). The Oxford handbook of the Russian economy. Oxford University Press

16 Gylfason, T. (2001). Natural resources, education, and economic development. European Economic Review, 45(4-6), pp. 847-859

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thus reducing sensitivity to external shocks such as the sudden drop in consumer prices can be implemented.¹⁷

1.3.1 Stabilization Funds

The negative effects of his illness on the economy due to the excessive amount of foreign currency entering the country have been expressed in previous chapters. Since this mechanism basically leads to the overvaluation of the country's currency, the first solution will be to change the direction of the international money entering the country to other areas. It reduces the ability to prevent and resolve social conflicts, and makes it difficult to provide public services such as education and health. After a while, it becomes difficult for the state to maintain order and dominate the region.

This situation increases the danger of civil war. Countries with rich natural resources in this situation are trying to achieve social peace by implementing populist policies or suppressing domestic rivals (unless there is terrorism or international intervention). Powerful energy importers do not hesitate to provide military aid to ensure political stability in these countries, ignoring anti-democratic practices and human rights violations in these countries. It is considered that these effects are behind the support of the regimes in Guinea and the Persian Gulf for a long time, and the uncertainty in raw material prices will be manageable through stabilization funds. While raw material prices are high, this will not pose much of a problem for economies. However, unexpected decreases in prices can cause serious problems. These unexpected declines can be compensated for through stabilization funds. For example, on January 1, 2004, the Russian Federation established the Russian Federation Stability Fund, which is a share of the federal budget and will be used to balance the federal budget if oil prices fall below a certain price. The main purpose of this fund is to absorb excess liquidity, reduce inflationary pressure, and protect against volatility in raw material export earnings.

These saved funds help to improve the management mechanism, especially by contributing to the transparency regarding the areas where the resource revenues are used. It also helps secure revenues (by accumulating reserves) against foreign assets, thereby protecting the country from the Dutch disease problem. In this way, the decrease in international competitive power as a result

17 Razavi, S. M., and Habibi, N. (2014). Decomposition of gender wage differentials in Iran: an empirical study based on household survey data. The Journal of Developing Areas, pp. 185-204.

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of the appreciation of the exchange rate is prevented. Finally, government spending is shaped by these fund revenues and thus fiscal discipline is increased.

1.3.2 Diversification and Liberalization in Foreign Trade

One of the most important methods for countries dependent on natural resource income to avoid the phenomenon of curse of resources is to diversify their economies. As stated before, not every country rich in natural resources is subject to a curse. Despite the high capital intensity of the resource sector, localization has played a role by taking significant strides in creating new jobs.

Almost half of the source countries use localization requirements that are widely established in all sectors of the economy. Countries with strong economic structures and healthy institutions can be protected from the negative effects of the curse of resources. In this sense, countries rich in natural resources should diversify their economic activities and not be dependent on a single source in foreign trade. In this way, both the phenomenon of the curse of resources can be avoided and it can be more sheltered in the natural resource market.¹⁸ Diversification can be made towards sub-sectors in the oil and mineral sector. It has made a great contribution to economic development due to extraction of resources, growth of employment, professional development and the formation of supply chains and supplies. Mining companies in the oil and gas and mining sectors spent exactly 40% to 80% of their revenues on purchases of goods and services. In some cases, these charges exceeded the amount of tax payments and royalties.¹⁹

More added value can be created by using the raw materials extracted in the country in these sub-sectors. On the other hand, many sub-sectors tend to have large amounts of cheap labor and it is known that the poor people benefit from opportunities. However, sub-sectors of the natural resource sector frequently fail. The most important reason for this is that developed countries apply customs tax to processed products in order to protect their own production sectors. While OECD countries do not impose customs duty on raw materials, they subject processed products to customs duties at various rates. In this case, while natural resource rich countries do not meet any obstacle to export their raw materials without creating added value, they are stuck with the tariff and non-tariff barriers of the OECD in sectors where they can produce added value and thus solve their

18 Larsen, E. R. (2005). Are rich countries immune to the resource curse? Evidence from Norway's management of its oil riches. Resources Policy, 30(2), pp. 75-86.

19 Kurbanov, T. (2012). Directions of national economic development in Azerbaijan. Black Sea Studies, (34), pp. 37-45.

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problems such as unemployment and economic development. At this point, removing all obstacles, which is the ultimate goal in foreign trade, will help countries rich in natural resources to diversify their economic activities and get rid of the curse of resources. ²⁰

1.3.3 Transparency

Corruption is the enemy of the free market and democracy. Corrupt countries feed corrupt business circles, and corrupt business communities feed corrupt countries. This is a vicious circle, and because of being able to break it, people and investors fight corruption, wherever they are; they need to raise their demands for transparent and accountable government.²¹ Countries abuse the profits of natural resources as they use very high amounts and these gains are collected in ways that people cannot watch. Most of these funds go into extra-budgetary funds or the pockets of country officials and these funds are never heard from again. The full specification of the natural resource profit will be considered a major step forward in the natural resource sector. Although this negative relationship has been proven by many studies as mentioned above, it is not clear why having abundance of natural resources creates such a disadvantage. But the critical point here is that disclosure of revenues is comprehensive and mandatory. Applying a partial profit disclosure can make things worse.²² If some firms that are responsible for transparency decide to disclose profits, these companies will have no chance of doing business in countries with high corruption.

Responsible firms will be replaced by other firms that do not cooperate in transparency, and the situation will worsen: responsible firms will be driven out of the country, and irresponsible firms will be able to work more easily with corrupt governments.²³

1.4 The Place and Importance of Natural Resources in National Economies in the Context