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Central Asia: EBRD Says Economies Risk 17th-Century 'Dutch Disease'

  • Ron Synovitz

A major international financial institution, the European Bank for Reconstruction and Development, is concerned that some Central Asian economies are relying too much on oil and natural gas exports. In an internal report, the EBRD compares their reliance on energy exports to the Holland's financial ruin of 1637, when its economy was overly dependent on the price of tulips. RFE/RL correspondent Ron Synovitz examines the relevancy of the 17th-century "Dutch disease" to Central Asia today.

Prague, 10 May 2001 (RFE/RL) -- An internal report by the board of the European Bank for Reconstruction and Development, or EBRD, warns that some Central Asian economies are at risk because of over-dependence on high prices for their energy exports.

The warning is contained in the EBRD's latest "Capital Resources Review," which was approved at the Bank's annual meeting in London last month.

The report says the challenge for Central Asian republics is to prevent so-called "Dutch disease" scenarios. It warns of situations where high international prices for oil and natural gas result in inflation and higher exchange rates, but stunt the development of agriculture and other industries.

The report says Central Asian leaders must devise ways to use revenues from energy exports more prudently so that their countries have a broader economic base.

The warning about "Dutch disease" is a reference to an economic calamity that occurred in 17th-century Holland because of a European craze for tulips. The event has become a basic economic lesson taught to schoolchildren throughout the West.

After tulips were introduced into Europe from Turkey in the mid-1500s, the vividly colored flowers quickly became a popular commodity.

As with international energy markets last year, the demand for different varieties of tulips during the 1600s exceeded the supply -- and prices for rare types of tulip bulbs rose to unwarranted heights in Northern Europe.

By 1610, a single bulb of a new tulip variety was acceptable as dowry for a bride, and one profitable brewery in France was exchanged for a single bulb of a variety called Tulip Brasserie.

The steadily rising prices of tulip bulbs tempted many in Holland to speculate in the market -- at the cost of developing other sectors of the economy.

Homes, estates, and industries were mortgaged so that bulbs could be bought for resale at higher prices. But the tulip market crashed early in 1637 when doubts arose about whether prices would continue to rise.

Almost overnight, the price structure for tulips collapsed. Fortunes were swept away and Holland was left in financial ruin because its economy was too dependent on high tulip prices.

Macroeconomic data on Turkmenistan shows its dependency on oil and gas exports is similar to Holland's tulip economy nearly 400 years ago.

The EBRD estimates that the country's Gross Domestic Product, or GDP, grew by nearly 18 percent last year. Turkmenistan's President Saparmurat Niyazov claims that growth rate is proof that the country is prospering under his policies.

But David Hexter, the EBRD's vice president for Russia and Central Asia, told RFE/RL that Turkmenistan's growth last year was primarily due to high international prices for Turkmenistan's main exports -- oil and natural gas.

"The growth in Turkmenistan over the last 12 months or so has been actually very positive -- largely fueled, of course, by the [global] trends in [high]) natural resource prices. Turkmenistan is very well endowed with natural resources -- which largely drive the economy."

Most important, while Turkmenistan's overall industrial output grew because of the strong but temporary boost provided by higher energy revenues, the country's non-energy sectors are in decline.

Although there are many differences between 17th-century Holland and today's Turkmenistan, the EBRD board is concerned about the similarities from a macroeconomic perspective.

For example, although cotton and wheat crops have traditionally been a major part of Turkmenistan's economy, agricultural output last year fell by 10 percent and is expected to fall again this year.

EBRD chief economist Willem Buiter predicts that lower global energy prices will cause overall GDP growth in Turkmenistan to slow from last year's 18 percent level to 6 percent this year.

Lower energy prices also have caused the EBRD to downgrade its growth forecasts for all other former Soviet republics that rely on oil and gas exports.

Kazakhstan's GDP growth is expected to fall from 9.6 percent last year to about 6 percent this year. Most of Kazakhstan's growth last year also was due to high world oil prices, while its agricultural output declined by 5 percent.

Russian's GDP growth -- which was about 7.7 percent last year -- is expected to slow to 3.4 percent because of lower prices received for its energy exports.

The forecast for Azerbaijan says GDP growth will slow from last year's 10.5 percent to about 8.5 percent this year.

EBRD President Jean Lemierre is visiting Azerbaijan today and tomorrow for talks with President Heidar Aliyev and other senior officials in charge of economic matters.

Lemierre is expected to praise the country's economic stability. But a statement from the EBRD says the main purpose of its strategy in Azerbaijan is to promote balanced economic growth.

As with its work in Central Asia and Russia, the EBRD is trying to help Azerbaijan become less dependent on energy exports. Bank projects are aimed at promoting small and medium-sized businesses, helping to build a more reliable financial sector, assisting in the privatization of medium-sized state firms, and helping to improve conditions for foreign investors in the country.