In economical terms, Dutch Disease is considered to be an effect that occurs in a country that has discovered considerable amounts of natural resources (especially oil), which makes it a primary export yet the export does not play any significant role in stimulating other developments in the country (Doucet, 2004). This can lead to other sectors of the economy becoming less competitive hence loosing profitability (Shelley, 2005). This is because other sectors of the economy might find themselves loosing manpower to the booming sector, and the general effect will be reduced economic growth.
This research paper looks at the effect the Dutch Disease had on Mexico in 1970s when oil reserves were discovered (Garner, & Spiro, 1993). Effects of Dutch Disease in Mexico Economic Problems When Lopez Portillo was elected as the president of Mexico in 1976, he was faced with a lot of economic crisis that needed to be addressed (Merrill, & Miro, 1997). While looking on how to address the issues, oil reserves were discovered in his country. The discovery brought about the fear that it might increase inflation; hence the government had to look for a mode of controlling the inflation by controlling the oil through Crown Corporation.
With time, Mexico started to receive increased revenue from the exportation of oil, and it was more advantageous when the OPEC prices were also increasing (Ponzio, 2006). However, the oil discovery was not of much importance to the Mexican citizens in terms of employment since they did not have the required expertise to work in the oil industry. This meant that the employment level remained low. When the Dutch Disease started to affect BOP (balance of payment) for Mexico, it led to other sectors of the economy like the food production being stagnant. To protect the local producers, the government had to increase importation tariffs.
This was a quick fix that did not look for a long term solution, but ended up hurting Mexico more as it became less competitive and modernized. The peso was devalued several times in 1982 making the situation even worse (Doucet, 2004). External Problems The Mexican government was able to get loans from the international banks using the oil reserves as a security. The price of oil in the international markets continued to rise, and there were a lot of imports coming into Mexico, that the infrastructure could not hold all of them. These activities increased internationals relations Mexico had with the countries she was trading with.
Social Problems As the effect of the Dutch Disease was setting in, Mexican citizens were not benefiting especially in terms of wealth creation (Siggel, 2005). To counter the effects, the government spending was increased, mostly subsiding food products. Spending of this nature does not have any economic value. There was increased borrowing, and later the oil prices dropped leaving Mexico having a very huge deficit (Werner, 2001). Political Problems President Portillo had to leave office a disgraced person after his policies failed, as the country continued to face a lot of problems.
To rectify the situation, the government under the new president had to reduce heavily on what it spends in public. This move helped to decrease the deficit that had been experienced in the BOP. After this moves, the government developed exportation and liberalized markets that economic progress started to be realized, and slowly the government was able to contain inflation. Environmental Problems Looking at the effects caused by oil discovery in Mexico, it can be concluded that oil is such an important natural resource, but if mismanaged, it can lead to very dangerous economic crisis which will end up affecting other sectors.
Natural resources are non renewable and once depleted, no more wealth can be created from it (Boscolo, & Faris, 2007). Therefore, it requires that once such resources have been discovered, proper economic measures needs to be taken to avoid experiencing the Dutch Disease effect (Sterner, 1994). Reference: Boscolo, Marco & Faris, Robert (2007). Environment & Sustainable Development: Natural Resource Management, retrieved on January 29, 2009 from http://74. 125. 77. 132/search? q=cache:pfBbdd-4N_IJ:www. cid. harvard. edu/archive/esd/nat_resource.
html+environmental+problems+of+Dutch+disease+in+Mexico&hl=en&ct=clnk&cd=7&gl=ke&client=firefox-a Doucet, Joseph (2004). Dutch Disease, Oil and Developing Countries, retrieved on January 29, 2009 from http://www. business. ualberta. ca/cabree/pdf/2004%20Fall%20UG%20Projects/Dutch%20disease,%20oil%20and%20developing%20countries. pdf. Garner, Richard L. , and Spiro E. Stefanou (1993). Economic Growth and Change in Bourbon Mexico, Gainesville: University Press of Florida Merrill, Tim L. and Miro, Ramon, (1997). Mexico: A Country Study. Washington D. C. : Library of Congress Cataloging-in-Publication Data,
Ponzio, Carlos Alejandro (2006). Export Boom and Rising Prices in Late Colonial Mexico: A Dutch Disease, retrieved on January 29, 2009 from http://www. economia. uanl. mx/publicaciones/Articulos-maestros/dutch. pdf. Shelley, Toby (2005). Oil: Politics, Poverty and the Planet; ISBN 1842775219, Zed Books, Siggel, Eckhard (2005). Development Economics: A Policy Analysis Approach; ISBN 0754642933, Ashgate Publishing, Ltd. Sterner, Thomas (1994). Economic Policies for Sustainable Development; ISBN 0792326806, Springer. Werner, Michael S. (2001). Concise Encyclopedia of Mexico Chicago: Fitzroy, Dearborn Publishers.