The Paradox of Plenty: The Dutch Disease

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Table of Contents

Introduction
Spain and the resource curse
Conclusion
Works cited

Introduction

Paradox of plenty is a term that is used to refer to a situation where the areas, regions or countries that have the largest deposits of the natural resources seem to be the least developed in the long run. It is also called the resource curse and is more prevalent in the economies that depend on the nonrenewable resources.

The paradox of plenty can be best illustrated by the Dutch disease, a theory that came from the Dutch experiences in the 1960s when it discovered reserves for natural gas, which handles the economic perspective of the increase in foreign income which unsettles the economy and leads to the overdependence on the sectors availing the large bucks (Havro and Santiso 7).

The Dutch disease is defined as the mechanics that see to it that the entry into the market of new commodities together with the changes in prices of commodities in an economic sector will result into suffering and unfavorable conditions to the other sectors due to the changes in the market forces and regulations. These negative impacts occur due to the emergence of a large source of foreign currency (Havro and Santiso 7).

Spain and the resource curse

The Spanish empire colonies, which were spread all over the world, were ruled over by Spain. At the time Spain had the advantage of having a source to the raw materials it got from these colonies, which included gold and silver. Additionally, the rulers in this empire used the locals and slaves to maximize the mining potentials. The minerals they got were shipped back to the motherland and they depended on this for their day to day monetary needs. Due to the increase of the empire’s size, the minerals also increased in size and diversity. (Karl 223).

Potosi, a city in Bolivia, was the biggest supplier of silver, which came from Cerro Rico, to the Spanish empire. Cerro rico was a very rich silver deposit and as the Spaniards explored the new found lands in1545, they landed at Potosi where they set up a base for mining silver and shipping it to the homeland. In the mining process, labor was obtained from the slave trade and the local Indian communities (Streich Para 7).

These silver deposits produced silver worth billions and this was seen as a source of easy wealth to Spain. The presence of the new wealth affected the other sectors of production in the country in that no efforts were made to develop the long term sustenance sectors since Spain used the silver to acquire cannons from other countries like England. The silver wealth made Spain’s currency increase in value which made the locally produced goods expensive thus reducing its competitive edge in relation to the goods from other countries. This led to increased imports into the country hence killing the local industries (Streich Para 1). Indeed, Spain became one of the poorest countries in Europe despite the huge gold and silver deposits it controlled.

The gold and silver from the new found lands led to the Spaniards ignoring other sources of development and revenue hence there was neglect of other sectors of development leading to a collapse of the economy which was solely based on these minerals. The mineral deposits became depleted and more and more of these colonies started struggling for independence. This led to the freeing up of the lands which were the source of minerals hence reduced productivity. By the 17th century, the high rates of inflation led to the bankruptcy of the economy of Spain which in turn led to massive negative impacts on other industries such as the textile industry (Economy Para 20). By 1800 there were groups of radicals who sought to end the monarchy rule for they saw the mistakes by the nobility in leadership as leading them to failure.

Political weakness of the Spain leadership lessened its power even from within Europe and this increased due to the absence of the heir to the throne while corruption and greed ruled the public offices. This situation continued with Spain not rising again to its former glory where it led the world as the most powerful state until it started opening up its borders to international trade especially after it joined the European Union (Economy 16).

Since this the economy of Spain has continued to prosper with the diversification of the modes of production which include agriculture, manufacturing, motor vehicles among others. Her main traders include France, Germany, and Britain among others

Conclusion

When new sources of foreign currency are introduced to the economy, their effects are felt in all spheres of the economy. If these sources move at a faster rate than those in the economy, there emerges an imbalance in trade because the value for money is increased and these sectors tend to pay highly competitive prices for their workforce. This leads to a shift in the production sector to accommodate this sector which eventually takes over due to its presumed results.

If nonrenewable resources are depleted, the economy fails because people have shifted their attention from the other sectors to concentrate on this ‘big performer’.

Works cited

“Economy.” Infoplease: Spain. 2009. Web.

Havro, Gøril and Santiso, Javier. “To Benefit from Plenty: Lessons from Chile and Norway.” Policy Brief No. 37. OECD Development Centre. 2008. Web.

Karl, Terry Lynn. The paradox of plenty: oil booms and petro-states. Los Angeles: University of California Press. 1997. Web.

Streich, Michael. Potosi and New World Silver: How Precious Metal Changed European Commerce and Finance. 2009. Web.

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The Paradox of Plenty: The Dutch Disease

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