THE French overseas territory of New Caledonia is, by all accounts, a tropical paradise, and is in general, considered rather well off compared with other equally beautiful Pacific island states and territories. That relative affluence, however, appears to be coming to a quick end, thanks to the recent financial struggles of global mining giant Glencore.
Although its shares have stabilized in the past few days after experiencing a panic-driven sell-off last week, Glencore appears headed for significant cutbacks. After May 2013, when the company absorbed former mining giant Xstrata in a deal which was worth $76 billion, the mining company went on a capital expenditure binge on the assumption that the downturn in metals prices at the time would soon return to normal. That never happened; metals prices, oil prices, and commodities in general continue to slide, and have probably not bottomed out yet.
That leaves the idyllic territory of New Caledonia in a very uncomfortable position. Apart from its scenery, the only substantial resource the archipelago (the territory consists of the large island of New Caledonia and several dozen smaller ones nearby, most of them uninhabited) has is nickel. Nickel has a variety of uses, but is mostly valuable these days as an ingredient in stainless steel. About one-fourth of the world’s known nickel reserves are found in New Caledonia, and not surprisingly, the territory’s economy is almost completely reliant on nickel revenues—which is a big problem when the price of the metal has dropped to less than $10,000 per metric ton, a six-year low, and there is a global stockpile of more than 450,000 metric tons waiting for buyers.
The three big nickel producers in New Caledonia—Glencore, which controls a smelter complex in the northern part of the main island, Brazilian multinational Vale, which has a similar operation in the south, and New Caledonia’s native French smelter concern, SLN, a subsidiary of Paris-based Eramet—are all reviewing their activities in New Caledonia. Glencore and Vale have invested $7 billion each, for which neither has seen so much as a dime of income, and SLN recently disclosed it is losing 12.5 million euros ($14 million) a month on its operations.
All of which makes New Caledonia a poster child for Dutch Disease: A reliance on a relatively abundant and lucrative natural resource that causes an ironic economic downturn because diversification is ignored. New Caledonia has nothing to fall back on if the nickel money train derails, having invested all of its profits from nickel into public services and material standards of living, rather than in other sources of income. No one knew they would need those other sources of income someday—or if they did know, they grossly overestimated the amount of time they would have to find a solution. Someday, however, turns out to be “now,” and New Caledonia is in big trouble as a result.
New Caledonia may be a spectacular current example, but it’s not the first, and it’s certainly not unique. Some oil-producing countries, particularly small states like Brunei or those clinging to the shores of the Persian Gulf, are already wrestling with finding ways to diversify before the taps run dry, an effort that is hugely complicated by oil prices being about a third of what they were when those governments embarked on it.
It can happen, and does happen, anywhere a single commodity dominates the economy—it could be oil, metal ore, timber, an agricultural crop, or even something intangible like tourism or casino gambling.
The Philippines obviously does not face the same sort of extreme risk as a place like New Caledonia; there is not one thing whose loss would collapse the entire economy. Nevertheless, the Philippine economy does have symptoms of Dutch Disease. The country relies heavily on remittances from overseas workers, and has done little to invest that huge revenue inflow—which accounts for 10 to 12 percent of GDP—into native sources of income apart from third-level services and consumption. The only other significant creator of revenue, the BPO industry, is no more secure in that sense than remittances are.
Economic diversity should be a top priority for the next administration, and should focus not just on building different economic sectors, but also expanding the population of those sectors; monopolies, duopolies, and oligopolies cancel out the benefits of diversity by channeling revenues into a single stream and creating a condition not substantially different from having a single or limited number of revenue sources.
So far, none of the aspirants for office have shown any indications of having thought that far ahead, and the weird fact that there are twice as many people running for vice president than there are running for president tends to suggest most of them, at least, actually have no plans to think beyond next spring.