Poor management of earnings from valuable natural resources results in a syndrome
known as Dutch Disease, characterised by real exchange rate appreciation, high labour
costs, and structural imbalances in economic development. Often a product of rentier
politics, Dutch Disease undermines long term economic performance in resource
dependent economies resulting in a ‘resource curse.’ The conventional wisdom argues
that institutions and state development at the time of a resource boom lock countries into
divergent developmental trajectories. I argue that political coalitions lay the foundation
for development of state and other institutions, and that changes in coalitions drive
changes in policy responses to resource booms. Botswana’s experience illustrates the
argument. Botswana has not entirely avoided symptoms of Dutch Disease, but has kept
them largely in check despite the fragility of state institutions when diamonds were
discovered. A broad and stable political coalition during the first decades of
independence encouraged adoption of progrowth policies and institutions. Rather than
lock the country into a persistent development trajectory, these institutions left room for
changes in political coalitions. As political coalitions change, economic policies and
performance are also likely to change.