Dutch Disease and the Public Sector: How Natural Resources Can Undermine Competitiveness in Africa

Slow growth in manufactured and agricultural exports has been attributed to the high share of natural resources in many African economies. Not only does the resource sector draw labour and capital away from other sectors, but also the spending of resource revenues in the domestic economy bids up the price of non-tradable goods, making the tradable sectors less competitive—a phenomenon known as Dutch disease. This paper argues that an important and neglected channel for this effect is through the public sector. Since government receives a large portion of resource revenues, the public-sector booms alongside the resource sector. But the government is largely unaccountable for the spending of these revenues, since they are not raised via taxes on citizens. The result is this money might be spent in inefficient and distortionary ways, undermining competitiveness. One solution may be for government to transfer natural-resource revenues directly to citizens and then tax them to finance public expenditure. The increased accountability might improve the effectiveness of the public sector and therefore the competitiveness of the private sector.