The politics of Dutch Disease: Institutions and the management of oil booms and busts in Venezuela and Indonesia

All of the oil exporting, capital deficient, developing countries, including Indonesia and Venezuela, faced major macroeconomic management problems in the 1970's and 1980's. The first question was how to manage the extra money they reaped from the oil booms in 1973 and 1979. In line with the common goal of economic growth and diversification of their economy, all pursued very ambitious development plans that involved import substitution industrialization as their centerpiece and which involved heavy state intervention in the economy as well as high levels of foreign borrowing. As these countries entered the 1980's things began to fall apart both economically and politically for all of them except Indonesia with the bust in oil prices in 1983 furthering this decline. As the price of oil started to soften in 1981, only Indonesia pursued a change in economic policies.;This dissertation builds on the work of economists who study Dutch Disease by analyzing why it is these countries made differing policy choices when they did--the politics of Dutch Disease. It takes a two step approach to analyzing policy outputs. It is argued that on the first level, more decisive macroeconomic institutions in Indonesia contributed to a swift and efficient adjustment to the changing international oil market conditions and that this type of institutional arrangement was not as prevalent in the other cases. On the second level, for policies to be successfully implemented it is necessary to build and maintain a social consensus around the direction of macroeconomic policy. The argument is that variation in institutional systems along with variation in level of social consensus over the direction of macroeconomic policy best explains variation in policy outputs.;This conclusion is based on a structured comparison of monetary, exchange rate and fiscal policy making in Indonesia and Venezuela from 1965-1990 as well as a quantitative comparison of all capital deficient oil exporting countries on the effects of institutional arrangements and levels of consensus on policy outcomes. In adopting this research strategy, the present study furthers our understanding of how particular institutional arrangements help or hinder states' abilities to adjust to changing international conditions in a way that transcends regime type. Interviews conducted with more than 100 policy makers, politicians, and businessmen in these two countries constitute the primary data. Secondary sources are used for the other cases.