In the 1960s, the Netherlands discovered massive natural gas reserves in the North Sea. What should have been a windfall turned into a structural nightmare: as gas exports surged, the Dutch guilder rose in value, making all other Dutch exports from machinery to tulip bulbs prohibitively expensive on the global market. Manufacturing slumped, and Dutch Disease was born.
Today, however, the most virulent strains of this economic virus are not found in the North Sea, but in the Global South. In countries like Pakistan and Afghanistan, the disease has mutated. It is no longer triggered solely by oil or gas, but by unearned foreign exchange like aid, remittances, and strategic rents that hollows out the productive core of the nation while creating a fragile, consumption led illusion of prosperity.
The Anatomy of the Disease
The traditional definition of Dutch Disease focuses on natural resources. In the 21st century Global South, we must expand this to include any massive influx of foreign currency that is not tied to domestic productivity.
Afghanistan provides perhaps the most extreme example of Aid-Induced Dutch Disease in modern history. Between 2001 and 2021, the country was the recipient of an unprecedented surge in foreign assistance. At its peak, official development assistance (ODA) and military spending accounted for nearly 100% of Afghanistan’s GDP. While this capital funded infrastructure and services, it decimated the tradable sector. The local Afghani currency was kept artificially strong by the constant flow of dollars, making traditional Afghan exports like dried fruits, carpets, and minerals uncompetitive. More critically, the service bubble drew the country’s brightest minds away from agriculture and industry. Why struggle to build a manufacturing plant when you could earn five times the salary as a translator, contractor, or consultant for an international NGO? When the aid withdrew in 2021, it revealed a hollowed out economy with no productive base to fall back on.
Pakistan faces a different but equally systemic version of the disease, driven by labor exports rather than aid. Remittances from the Pakistani diaspora, particularly from the Gulf, have grown into a $27 billion to $30 billion annual lifeline. While these funds provide essential poverty alleviation, they act as a steroid for the currency. By providing a constant stream of foreign exchange that is not earned through the export of goods, remittances allow the state to maintain a relatively stable Rupee while ignoring the structural decline of the textile and manufacturing sectors.
The mechanism of decay is consistent: the crowding out effect. When unearned money enters the system, it flows into non-tradable sectors like goods and services that cannot be exported. In Pakistan, this has manifested as a pathological obsession with real estate. Capital that should be flowing into technology startups or industrial upgrades is instead parked in housing societies and speculative land trading. This is dead capital as it creates no jobs, no exports, and no innovation, yet it offers higher returns than a factory ever could because the currency dynamics favor consumption over production.
This leads to institutional erosion, a phenomenon best illustrated by Nigeria’s post colonial history. From the 1970s onward, Nigeria’s reliance on oil rents allowed the state to decouple from its citizens. When a government does not need to tax its people because it has oil or aid, it feels no accountability to them. The social contract breaks. The state becomes a rentier state, focused on distributing the spoils of the resource rather than building a functional, tax paying industrial base. In Nigeria, this led to premature deindustrialization, the shrinking of the manufacturing sector before the country had even achieved middle income status.
The Fork in the Road
The history of the Global South is not a monolithic tale of failure. There is a clear fork in the road where some nations recognized the virus and took early, painful measures to inoculate themselves.
Indonesia and Malaysia provide the most striking positive contrasts to the Nigeria, Pakistan, and Afghanistan trajectory. In the early 1970s, Indonesia was as oil dependent as Nigeria. However, Indonesia made a conscious, strategic decision during the oil booms of 1973 and 1979. Rather than using the windfall to import luxury goods or subsidize urban consumption, they diverted the wealth into the Green Revolution. They built irrigation, provided subsidized fertilizers, and ensured that the rural agricultural sector, the backbone of the economy, did not wither away. By the time oil prices crashed in the 1980s, Indonesia had a self-sufficient agricultural base and was ready to pivot toward low end manufacturing.
Malaysia followed a similar path of directed diversification. In the 1960s, Malaysia was the world’s largest producer of tin and rubber. Recognizing that commodity prices are a roller coaster, the Malaysian state used its commodity wealth to build world class infrastructure and a workforce trained in technical skills. They didn’t just wait for the market to work, they created Free Trade Zones and courted multinational electronics firms like Intel in the 1970s. Today, Malaysia is a critical node in the global semiconductor supply chain.
The strategic difference between these successes and the failures seen elsewhere is the perception of time. Indonesia and Malaysia viewed their booms as temporary windows of opportunity, a bridge to the next stage of development. In contrast, countries suffering from Dutch Disease often treat the boom (whether aid, oil, or remittances) as a permanent lifestyle. They build high rise malls instead of power plants and fund civil service salaries instead of research and development.
The failure of inertia is the most dangerous stage of the disease. Once a country’s manufacturing base shrinks, the skills gap becomes a chasm. If a generation of Pakistanis or Nigerians grows up in an environment where the only way to get rich is through land speculation or political connections, the know-how of industrial production simply evaporates. This is why diversification is so difficult as you aren’t just building factories, you are trying to rebuild a lost culture of making things.
Diversification as a Generational Social Metamorphosis
The most common mistake made by international lenders like the IMF or national planning commissions is the belief that diversification is a matter of policy. They believe that if you just get the exchange rate right or lower corporate taxes, the economy will diversify. This is a planning myth. In reality, economic diversification is a multi-decade, generational process that requires a total social transformation.
First, we must acknowledge the timeline. It took South Korea forty years to move from a war torn agrarian society to a global leader in high tech exports. It took China thirty years of sustained, 10% growth to move its population from the fields to the factories. This is longer than the lifespan of any single government or five year plan. Diversification requires policy continuity, the ability of a nation to stick to a single industrial strategy for 30 to 50 years, regardless of who is in power. In the politically volatile climates of the Global South, where a new administration often spends its first year dismantling the projects of its predecessor, this continuity is almost impossible to find.
Second, there is the cultural shift from rent to value. Most Global South economies are dominated by a merchant or landlord mindset. In this logic, the goal is to find an asset like a piece of land, a government license, or a shipment of imports and sell it at a higher price or collect rent on it. This is extractive wealth. An industrialist mindset is fundamentally different as it is based on value added complexity. It requires an obsession with efficiency, engineering, and long term gains over short term deals. Shifting a national culture from seeking rent to creating value is not an economic task; it is an educational and psychological one.
The education as the engine argument is often misunderstood. It is not about increasing literacy rates or the number of PhDs. It is about the type of education. Many countries suffering from Dutch Disease have education systems that are bureaucrat factories designed to produce people who can fill seats in a government office or a bank. Diversification requires creators like engineers, coders, designers, and technicians. This requires a massive, multi-decade investment in vocational training and a social value system that treats a master welder or a software architect with the same prestige as a lawyer or a civil servant.
Finally, none of this is possible without social trust. Industrial diversification requires long term capital. Building a factory that will take 10 years to turn a profit requires the investor to trust that the electricity will stay on, the laws won’t change, and the state won’t seize the assets. In countries global south, where the rules of the game are constantly in flux, the only logical investment is a short term one like real estate or trade. High trust societies can build complex things, low trust societies are limited to simple, extractive activities.
For countries like Pakistan and Afghanistan, the Invisible Virus of Dutch Disease is deep within the bone. The reliance on unearned wealth has created a comfort trap that is difficult to escape. However, the examples of Southeast Asia show that the resource curse is not a destiny, it is a choice.
Diversification is not a project to be completed by a ministry, it is a social metamorphosis that must be embraced by the entire population. It requires the painful detox from easy money and the patient, boring work of building human capital. The path forward is not about finding the next big aid package or a new oil field, it is about rebuilding the dignity of local production and realizing that a nation’s true wealth is not what it finds or receives, but what it can make.
