The Dutch disease is when a government earns lots of easy foreign currency from oil exports and the economic and political disruption it causes to the country. Many believe the 1979 Revolution to be a result of a severe case of Dutch disease contracted by Iran in 1975.
Symptoms of the Dutch disease reemerged in Iran’s economy in 1984-85 when oil exports jumped to $50 billion. Yet again, between 2002 and 2012, the country fell for oil revenues hook, line and sinker. And the last time windfall gains of natural resources misled an Iranian government was after the JCPOA nuclear deal in 2015. The populist nature of political structures is believed to be the cause of this disease and that is not just exclusive to Iran. Economists show that when a country develops the Dutch disease, the traditional export sector (manufacturing and agriculture) gets dumped for cheap imports. In 1975, Petrodollars in effect wreaked havoc on all political and social structures of the country. Economically, massive inflation hit the country, creating an inequality substantial enough to lead to a national breakdown. The Islamic Revolution saved Iran’s economy, as there was no recovery within the rigged old economic system. Again between 2001 and 2012, the country was afflicted by the same old problem but thanks to the far bigger economy, it recovered from the shock in time and escaped a crash.
Governments’ access to oil resources makes them less dependable on tax revenues. They become distributors of oil revenues. They display an attitude of superiority and power toward people, as they play the role of a giver toward the people receiving the largesse, oil money paves the way for the involvement of the government in all sectors, becoming bigger but losing its policymaking capabilities. The oil revenues incites many producers to opt for easy ways to earn more by asking government for a cut from oil revenues that would ultimately lead to institutionalized rent-seeking behaviors(cronyism, corruption). A significant number of economic enterprises supplying goods or services in actuality owe their existence to the allowances they receive from oil money. Unrealistic public expectations about oil revenues is another negative impact of oil on the society. So much so that they believe that the government must deliver all goods or services at very low prices. The government’s failure to do so is usually blamed on its inefficiency and corruption. People then tend to ignore all services offered by the government. Such an exaggerated image often results in weak tax compliance and legitimization of tax evasion.
Originally published by Financial Tribune