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Is Switzerland showing symptoms of the Dutch Disease?

With Wenhong Xu (Chinese Academy of Social Sciences)




The discovery of the Groningen gas fields in 1959 was followed by a boom in foreign investment. This led to an appreciation of the Dutch Guilder (see Figures below). At the same time, well-payed jobs in the oil and gas sector emerged.


The Dutch Guilder to the US Dollar (left) and the British Pound (right). (Copyright: FXTOP, 2015, from fxtop.com/)

A stronger Guilder made it harder for manufacturing companies to export their goods, while high wages in the oil and gas sector made it harder for them to compete for employees. What followed was a long but steady decline of the manufacturing sector in the Netherlands. The decline of manufacturing is not a typical Dutch phenomenon: Other countries experienced a similar decline. However, the degree of it was remarkable (see Figure below).


Manufacturing in the Netherlands was hit harder than in other countries. (Source: UN)

Crucially, instead of an exceptional economic boom, economic growth was "just fine" until the 80s; and underwhelming from the mid-80s to the mid-90s. That is, when economic difficulties arrived in the mid-80s, there were no other sectors to rely on. It's a bit like monoculture forestry: When there's an infestation, all you can do is to watch the whole forest being infested.

Text books in economics call this the Dutch Disease. The discovery of large amounts of a certain resource can replace an entire sector in a country's economy. (The Dutch Disease is linked to the Resource Curse.)

Interestingly, other economies with large amount of resources, e.g. the US or Scotland, did not fall sick with the Dutch Disease. So, how come the Netherlands were hit so badly? I think the critical factor is the vulnerability of the local currency to foreign investment.
In 1960, the Guilder was reflecting an economy based on 11m people. This contrasts to about 55m in the case of the Pound and Scotland when the North Sea oil fields were discovered and to about 190m people living in the US back in the 1960s. Any amount of foreign investment would have affected the Guilder considerably more than the Pound or the Dollar. Those were/are less volatile, less vulnerable to foreign investment. (Particularly today, the US economy is well-diversified: There's the Silicon Valley in California, the strong agricultural sector in the Midwest, the car industry in the North-East, the financial sector in the East, and the oil and gas fields in the North and the South.)


The Netherlands of 2016 are immune to the Dutch Disease

All that said, here's the interesting point: I would argue that the Netherlands of 2016 are immune to the Dutch Disease - because of a trans-regional currency and free movement of labour within Europe. The extra influx of foreign investment would have not mattered that much. First, a good chunk of the investments would have come from the same economic area (what would have been Deutschmark-to-Guilder-investments would be Euro-to-Euro-investments today). Second, the Euro reflects an economy based on about 330m people. It would take a lot of foreign investment to cause the shifts that we saw 50 years ago. As to wages, Dutch manufactures might have lost employees to the oil and gas industry, but they would have also been able to hire new employees Europe-wide. So, if the Groningen gas field had been discovered today, the Dutch manufacturing sector might have been able to compete. (This is something that certain Finish politicians might want to keep in mind when they claim that Finland would be better off without the Euro.)


In 2016, the focus is shifting to another European country – Switzerland

In 2016, there is another European country whose economic situation resembles the Dutch economy of the early 1960s: Switzerland. Switzerland has an overblown financial sector that attracts a lot of foreign investment, driving up the Swiss Franc (according to one measure, the financial sector makes up about 10.5% of their economy; this contrasts to 3.6% in Germany and 4.4% in France). The Swiss Franc reflects an economy of about 8m people, so it is rather vulnerable to changes in exchange rates due to foreign investment.

Of course, there are differences to the Netherlands in the 1960s. The discovery of the Groningen gas fields triggered a sudden shift in the Dutch economy. The build-up of the financial sector in Switzerland, on the other hand, was a gradual process; so manufacturers had considerable time to adapt.

However, there have been sudden shifts in Switzerland, too: In 2015, the Swiss National Bank decided that they could not uphold the minimum exchange rate of 1.20CHF for 1.00EUR. Subsequently, the Franc appreciated considerably. This makes it more difficult for export-orientated companies to sell their goods abroad. And in 2014, the Swiss people decided in a referendum to close off their labour market to their European neighbours. The vote is supposed to become law in 2016. This will make it even harder for Swiss manufactures to compete for employees at affordable wages (as the financial sector is paying extremely well and manufacturers cannot rely as much on cheaper European workers anymore). Swiss manufacturers might find it difficult to adapt to such sudden shifts, just like Dutch manufacturers found it difficult to adapt back in the 1960s.

Swiss growth in 2015 has been underwhelming, while the unemployment rate started to increase notably. Nonetheless, the Franc is staying strong (presumably backed by a strong financial sector). 2015 could be a one-off bump. Or it could be something bigger: The first symptoms of the Dutch Disease that will reshape the Swiss economy in the near future.



tsj; originally posted on 26 Jan 2016
last modified: 30 Jan 2016