Dutch disease

Last updated

In economics, the Dutch disease is the apparent causal relationship between the increase in the economic development of a specific sector (for example natural resources) and a decline in other sectors (like the manufacturing sector or agriculture). The putative mechanism is that as revenues increase in the growing sector (or inflows of foreign aid), the given nation's currency becomes stronger (appreciates) compared to currencies of other nations (manifest in an exchange rate). This results in the nation's other exports becoming more expensive for other countries to buy, and imports becoming cheaper, making those sectors less competitive. While it most often refers to natural resource discovery, it can also refer to "any development that results in a large inflow of foreign currency, including a sharp surge in natural resource prices, foreign assistance, and foreign direct investment". [1]


The term was coined in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of the large Groningen natural gas field in 1959. [2]


Natural gas concessions in the Netherlands. Today the Netherlands accounts for more than 25% of all natural gas reserves in the EU. Natural gas NL.png
Natural gas concessions in the Netherlands. Today the Netherlands accounts for more than 25% of all natural gas reserves in the EU.

The classic economic model describing Dutch disease was developed by the economists W. Max Corden and J. Peter Neary in 1982. In the model, there is a non-tradable sector (which includes services) and two tradable sectors: the booming sector, and the lagging (or non-booming) tradable sector. The booming sector is usually the extraction of natural resources such as oil, natural gas, gold, copper, diamonds or bauxite, or the production of crops, such as coffee or cocoa. The lagging sector is usually manufacturing or agriculture.

A resource boom affects this economy in two ways:

  1. In the "resource movement effect", the resource boom increases demand for labor, which causes production to shift toward the booming sector, away from the lagging sector. This shift in labor from the lagging sector to the booming sector is called direct-deindustrialization. However, this effect can be negligible, since the hydrocarbon and mineral sectors tend to employ few people. [3]
  2. The "spending effect" occurs as a result of the extra revenue brought in by the resource boom. It increases demand for labor in the non-tradable sector (services), at the expense of the lagging sector. This shift from the lagging sector to the non-tradable sector is called indirect-deindustrialization. [3] The increased demand for non-traded goods increases their price. However, prices in the traded good sector are set internationally, so they cannot change. This amounts to an increase in the real exchange rate. [4]

Resource-based international trade

In a model of international trade based on resource endowments as the Heckscher–Ohlin/Heckscher–Ohlin-Vanek, the Dutch disease can be explained by the Rybczynski Theorem.


Using data on 118 countries over the period 1970–2007, a study by economists at the University of Cambridge provides evidence that the Dutch disease does not operate in primary commodity-abundant countries.[ why? ] [5] They also show that it is the volatility in commodity prices, rather than abundance per se, that drives the resource curse paradox since the negative impact of commodity terms of trade volatility on GDP per capita is larger than the growth enhancing effects of commodity booms. A study of the resource-rich Australian and Norwegian economies has shown that a booming resource sector can have positive effects (or 'spillovers') on non-resource sectors, which have not been captured in previous analysis. Construction and services, and to a lesser extent manufacturing benefit from these spillovers. [6] [7]


Simple trade models suggest that a country should specialize in industries in which it has a comparative advantage; so a country rich in some natural resources would be better off specializing in the extraction of those natural resources.

However, other theories suggest that this is detrimental, for example when the natural resources deplete. Also, prices may decrease and competitive manufacturing cannot return as quickly as it left. This may happen because technological growth is smaller in the booming sector and the non-tradable sector than the non-booming tradable sector. [8] Because that economy had smaller technological growth than did other countries, its comparative advantage in non-booming tradable goods will have shrunk, thus leading firms not to invest in the tradables sector. [9]

Also, volatility in the price of natural resources, and thus the real exchange rate, limits investment by private firms, because firms will not invest if they are not sure what the future economic conditions will be. [10] Commodity exports such as raw materials, drive up the value of the currency. This is what leads to the lack of competition in the other sectors of the economy. The extraction of natural resources is also extremely capital intensive, resulting in few new jobs being created. [11]


There are two basic ways to reduce the threat of Dutch disease: slowing the appreciation of the real exchange rate, and boosting the competitiveness of the adversely affected sectors. One approach is to sterilize the boom revenues, that is, not to bring all the revenues into the country all at once, and to save some of the revenues abroad in special funds and bring them in slowly. In developing countries, this can be politically difficult as there is often pressure to spend the boom revenues immediately to alleviate poverty, but this ignores broader macroeconomic implications.

Sterilization will reduce the spending effect, alleviating some of the effects of inflation. Another benefit of letting the revenues into the country slowly is that it can give a country a stable revenue stream, giving more certainty to revenues from year to year. Also, by saving the boom revenues, a country is saving some of the revenues for future generations. Examples of these sovereign wealth funds include the Australian Government Future Fund, Iranian national development fund, the Government Pension Fund in Norway, the Stabilization Fund of the Russian Federation, the State Oil Fund of Azerbaijan, Alberta Heritage Savings Trust Fund of Alberta, Canada, and the Future Generations Fund of the State of Kuwait established in 1976. Recent[ when? ] talks led by the United Nations Development Programme in Cambodia – International Oil and Gas Conference on fueling poverty reduction – point out the need for better education of state officials and energy CaDREs (Capacity Needs Diagnostics for Renewable Energies) linked to a sovereign wealth fund to avoid the resource curse (Paradox of plenty). [12]

Another strategy for avoiding real exchange rate appreciation is to increase saving in the economy in order to reduce large capital inflows which may appreciate the real exchange rate. This can be done if the country runs a budget surplus. A country can encourage individuals and firms to save more by reducing income and profit taxes. By increasing saving, a country can reduce the need for loans to finance government deficits and foreign direct investment.

Investments in education and infrastructure can increase the competitiveness of the lagging manufacturing or agriculture sector. Another approach is government protectionism of the lagging sector, that is, increase in subsidies or tariffs. However, this could worsen the effects of Dutch disease, as large inflows of foreign capital are usually provided by the export sector and bought up by the import sector. Imposing tariffs on imported goods will artificially reduce that sector's demand for foreign currency, leading to further appreciation of the real exchange rate. [13]


It is usually difficult to be certain that a country has Dutch disease because it is difficult to prove the relationship between an increase in natural resource revenues, the real-exchange rate, and a decline in the lagging sector. An appreciation in the real exchange rate could be caused by other things such as productivity increases in the Balassa-Samuelson effect, changes in the terms of trade and large capital inflows. [14] Often these capital inflows are caused by foreign direct investment or to finance a country's debt. However, evidence does exist suggesting that unexpected and very large oil and gas discoveries do cause the appreciation of the real exchange rate and the decline of the lagging sector across affected countries on average. [15]


See also

Related Research Articles

Economy of American Samoa Economy of American Samoa

The economy of American Samoa is a traditional Polynesian economy in which more than 90% of the land is communally owned. Economic activity is strongly linked to the United States, with which American Samoa conducts the great bulk of its foreign trade. Tuna fishing and processing plants are the backbone of the private sector, with canned tuna being the primary export. Transfers from the U.S. federal government add substantially to American Samoa's economic well-being. Attempts by the government to develop a larger and broader economy are restrained by Samoa's remote location, its limited transportation, and its devastating hurricanes.

Economy of Grenada

The economy of Grenada is a largely tourism-based, small and open economy. Over the past two decades, the main thrust of Grenada's economy has shifted from agriculture to services, with tourism serving as the leading foreign currency earning sector. The country's principal export crops are the spices nutmeg and mace. Other crops for export include cocoa, citrus fruits, bananas, cloves, and cinnamon. Manufacturing industries in Grenada operate mostly on a small scale, including production of beverages and other foodstuffs, textiles, and the assembly of electronic components for export.

The economy of Guinea is dependent largely on agriculture and other rural activities. Guinea is richly endowed with minerals, possessing an estimated quarter of the world's proven reserves of bauxite, more than 1.8 billion tonnes of high-grade iron ore, significant diamond and gold deposits, and undetermined quantities of uranium.

Economy of Indonesia Overview of the economy of Indonesia

The economy of Indonesia is the largest in Southeast Asia and is one of the emerging market economies of the world. As an upper-middle income country and member of the G20 Indonesia is classified as a newly industrialised country. It is the 16th largest economy in the world by nominal GDP and the 7th largest in terms of GDP (PPP). Estimated at US$40 billion in 2019, Indonesia’s Internet economy is expected to cross the US$130 billion mark by 2025. Indonesia depends on domestic market and government budget spending and its ownership of state-owned enterprises. The administration of prices of a range of basic goods also plays a significant role in Indonesia's market economy. However, since the 1990s, the majority of the economy has been controlled by individual Indonesians and foreign companies.

Economy of Nigeria National economy

The economy of Nigeria is a middle-income, mixed economy and emerging market, with expanding manufacturing, financial, service, communications, technology and entertainment sectors. It is ranked as the 27th-largest economy in the world in terms of nominal GDP, and the 24th-largest in terms of purchasing power parity. Nigeria has the largest economy in Africa; its re-emergent manufacturing sector became the largest on the continent in 2013, and it produces a large proportion of goods and services for the West African subcontinent. In addition, the debt-to-GDP ratio is 16.075 percent as of 2019.

Economy of Pakistan National economy

The economy of Pakistan is the 23rd largest in the world in terms of purchasing power parity (PPP), and 42nd largest in terms of nominal gross domestic product. Pakistan has a population of over 220 million, giving it a nominal GDP per capita of $1,357 in 2019, which ranks 154th in the world and giving it a PPP GDP per capita of 5,839 in 2019, which ranks 132nd in the world for 2019. However, Pakistan's undocumented economy is estimated to be 36% of its overall economy, which is not taken into consideration when calculating per capita income. Pakistan is a developing country and is one of the Next Eleven countries identified by Jim O'Neill in a research paper as having a high potential of becoming, along with the BRICS countries, among the world's largest economies in the 21st century. The economy is semi-industrialized, with centres of growth along the Indus River. Primary export commodities include textiles, leather goods, sports goods, chemicals and carpets/rugs.

Economy of Seychelles Economy of the country

The economy of Seychelles is based on fishing, tourism, processing of coconuts and vanilla, coir rope, boat building, printing, furniture and beverages. Agricultural products include cinnamon, sweet potatoes, cassava (tapioca), bananas, poultry and tuna.

Exchange rate Rate at which one currency will be exchanged for another

In finance, an exchange rate is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country's currency in relation to another currency. For example, an interbank exchange rate of 114 Japanese yen to the United States dollar means that ¥114 will be exchanged for each US$1 or that US$1 will be exchanged for each ¥114. In this case it is said that the price of a dollar in relation to yen is ¥114, or equivalently that the price of a yen in relation to dollars is $1/114. The government has the authority to change exchange rate when needed.

In economics, hot money is the flow of funds from one country to another in order to earn a short-term profit on interest rate differences and/or anticipated exchange rate shifts. These speculative capital flows are called "hot money" because they can move very quickly in and out of markets, potentially leading to market instability.

Foreign exchange reserves are cash and other reserve assets held by a central bank or other monetary authority that are primarily available to balance payments of the country, influence the foreign exchange rate of its currency, and to maintain confidence in financial markets. Reserves are held in one or more reserve currencies, nowadays mostly the United States dollar and to a lesser extent the euro.

The Balassa–Samuelson effect, also known as Harrod–Balassa–Samuelson effect, the Ricardo–Viner–Harrod–Balassa–Samuelson–Penn–Bhagwati effect, or productivity biased purchasing power parity (PPP) is the tendency for consumer prices to be systematically higher in more developed countries than in less developed countries. This observation about the systematic differences in consumer prices is called the "Penn effect". The Balassa–Samuelson hypothesis is the proposition that this can be explained by the greater variation in productivity, between developed and less developed countries, in the traded goods' sectors than in the non-tradable sectors.

The resource curse, also known as the paradox of plenty, refers to the paradox that countries with an abundance of natural resources, tend to have less economic growth, less democracy, and worse development outcomes than countries with fewer natural resources. There are many theories and much academic debate about the reasons for, and exceptions to, these adverse outcomes. Most experts believe the resource curse is not universal or inevitable, but affects certain types of countries or regions under certain conditions.

Export-oriented industrialization Development strategy based on global trade

Export-oriented industrialization (EOI) sometimes called export substitution industrialization (ESI), export led industrialization (ELI) or export-led growth is a trade and economic policy aiming to speed up the industrialization process of a country by exporting goods for which the nation has a comparative advantage. Export-led growth implies opening domestic markets to foreign competition in exchange for market access in other countries.

The economic history of Brazil covers various economic events and traces the changes in the Brazilian economy over the course of the history of Brazil. Portugal, which first colonized the area in the 16th century, enforced a colonial pact with Brazil, an imperial mercantile policy, which drove development for the subsequent three centuries. Independence was achieved in 1822. Slavery was fully abolished in 1888. Important structural transformations began in the 1930s, when important steps were taken to change Brazil into a modern, industrialized economy.

Economic history of Turkey

The economic history of the Republic of Turkey may be studied according to sub-periods signified with major changes in economic policy:

  1. 1923–1929, when development policy emphasised private accumulation;
  2. 1929–1945 when development policy emphasised state accumulation in a period of global crises;
  3. 1950–1980, a period of state guided industrialisation based on import substituting protectionism;
  4. 1980 onwards, opening of the Turkish economy to liberal trade in goods, services and financial market transactions.
Economy of the Middle East

The economy of the Middle East is very diverse, with national economies ranging from hydrocarbon-exporting rentiers to centralized socialist economies and free-market economies. The region is best known for oil production and export, which significantly impacts the entire region through the wealth it generates and through labor utilization. In recent years, many of the countries in the region have undertaken efforts to diversify their economies.

A sudden stop in capital flows is defined as a sudden slowdown in private capital inflows into emerging market economies, and a corresponding sharp reversal from large current account deficits into smaller deficits or small surpluses. Sudden stops are usually followed by a sharp decrease in output, private spending and credit to the private sector, and real exchange rate depreciation. The term “sudden stop” was inspired by a banker’s comment on a paper by Rüdiger Dornbusch and Alejandro Werner about Mexico, that “it is not speed that kills, it is the sudden stop”.

This article is about the economic history of Ecuador and its evolution from colonial to modern times.

An oil boom is a period of largeinflow of income as a result of high global oil prices or large oil production in an economy. Generally, this short period initially brings economic benefits, in terms of increased GDP growth, but might later lead to a resource curse.

Baltic states housing bubble

The Baltic states housing bubble is an economic bubble involving major cities in Estonia, Latvia and Lithuania. The Baltic States had enjoyed a relatively strong economic growth between 2000 and 2006, and the real estate sectors had performed well since 2000. In fact, in between 2005Q1 and 2007Q1, the official house price index for Estonia, Latvia and Lithuania recorded a sharp jump of 104.6%, 134.3% and 106.7%. By comparison, the official house price index for Euro Area increased by 11.8% for a similar time period.


  1. Ebrahim-zadeh, Christine (March 2003). "Back to Basics – Dutch Disease: Too much wealth managed unwisely". Finance and Development, A quarterly magazine of the IMF. IMF. Archived from the original on 17 June 2008. Retrieved 17 June 2008. This syndrome has come to be known as "Dutch disease". Although the disease is generally associated with a natural resource discovery, it can occur from any development that results in a large inflow of foreign currency, including a sharp surge in natural resource prices, foreign assistance, and foreign direct investment. Economists have used the Dutch disease model to examine such episodes, including the impact of the flow of American treasures into sixteenth-century Spain and gold discoveries in Australia in the 1850s.
  2. "The Dutch Disease". The Economist. 26 November 1977. p. 82–83.
  3. 1 2 Corden WM (1984). "Boom Sector and Dutch Disease Economics: Survey and Consolidation". Oxford Economic Papers. 36 (3): 362. doi:10.1093/oxfordjournals.oep.a041643.
  4. Corden WM, Neary JP (1982). "Booming Sector and De-industrialisation in a Small Open Economy" (PDF). The Economic Journal. 92 (December): 825–48. doi:10.2307/2232670. JSTOR   2232670.
  5. Cavalcanti, Tiago; Mohaddes, Kamiar & Raissi, Mehdi (2011). "Commodity Price Volatility and the Sources of Growth" (PDF). Cambridge Working Papers in Economics. Archived from the original (PDF) on 21 November 2014.
  6. Bjørnland, Hilde C.; Thorsrud, Leif Anders (13 February 2017). "The 'Dutch disease' reexamined: Resource booms can benefit the wider economy". LSE Business Review. London School of Economics . Retrieved 11 November 2019.
  7. Bjørnland, Hilde C.; Thorsrud, Leif A. (2016). "Boom or Gloom? Examining the Dutch Disease in Two-speed Economies" (PDF). The Economic Journal. 126 (598): 2219–2256. doi:10.1111/ecoj.12302. S2CID   15748939.
  8. Van Wijnbergen, Sweder (1984). "The 'Dutch Disease': A Disease After All?". The Economic Journal. 94 (373): 41–55. doi:10.2307/2232214. JSTOR   2232214.
  9. Krugman, Paul (1987). "The Narrow Moving Band, the Dutch Disease, and the Competitive Consequences of Mrs. Thatcher". Journal of Development Economics. 27 (1–2): 50. doi:10.1016/0304-3878(87)90005-8.
  10. Gylfason, Thorvaldur; Herbertsson, Tryggvi Thor; Zoega, Gylfi (1999). "A Mixed Blessing". Macroeconomic Dynamics. 3 (2): 204–225. doi:10.1017/S1365100599011049.
  11. "It's only natural". The Economist. 9 September 2010.
  12. Karl, Terry Lynn (1997). The paradox of plenty : oil booms and petro-states. Berkeley: University of California Press. ISBN   9780520918696. OCLC   42855014.
  13. Collier, Paul (2007). "The Bottom Billion". Oxford University Press, p. 162
  14. De Gregorio, José; Wolf, Wolger C. (1994). "Terms of Trade, Productivity, and the Real Exchange Rate". NBER Working Paper No. 4807. SSRN   6891 .
  15. Harding, Torfinn; Stefanski, Radek; Toews, Gerhard (August 2020). "Boom Goes the Price: Giant Resource Discoveries and Real Exchange Rate Appreciation". The Economic Journal. 130 (630): 1715-1728. doi:10.1093/ej/ueaa016.
  16. 1 2 Corden (1984), 359
  17. Peter Martin (30 August 2012). "Warning: After the boom it'll be Dutch and go". Sydney Morning Herlad.
  18. Paul Cleary (11 November 2007). "Mining boom could bust us". Melbourne: The Age.
  19. Peter Ker; Ben Schniders (6 September 2011). "Labor woeful on economic reform, Says Argus". The Sydney Morning Herald.
  20. "Archived copy" (PDF). Archived from the original (PDF) on 15 March 2012. Retrieved 2 December 2010.CS1 maint: archived copy as title (link)
  21. "Boom and gloom". The Economist. 8 March 2007.
  22. Lee Greenberg (20 July 2011). "Growing Equalization Payments to Ontario Threaten Country". National Post.
  23. Michel Beine; Charles S. Bos; Serge Coulombe (January 2009). "Does the Canadian economy suffer from Dutch Disease?" (PDF).
  24. McCawley, Peter (March 1980). "Indonesia's New Balance of Payments Problem: a Surplus to get rid of". Ekonomi Dan Keuangan Indonesia. 28 (1): 39–58.
  25. "Our Continent, Our Future" Archived 16 April 2007 at the Wayback Machine , Mkandawire, T. and C. Soludo. "In most recent attempts to explain Africa's performance with growth and investment regressions, studies find that inaccessible location, poor port facilities, and the 'Dutch Disease' syndrome, caused by large natural-resource endowments, constitute serious impediments to investment and growth".
  26. "Strong forex inflows now hurting economy, GMANews.TV.
  27. "Dutch Disease Hits Russia" Archived 28 September 2007 at the Wayback Machine , Latsis, O. (2005). Moscow News, 8–14 June.
  28. Mining accounts for most of the economic growth
  29. Drelichman, Mauricio (1 July 2005). "The curse of Moctezuma: American silver and the Dutch disease". Explorations in Economic History. 42 (3): 349–80. CiteSeerX . doi:10.1016/j.eeh.2004.10.005.
  30. Bjørnland, Hilde (1998). "The Economic Effects of North Sea Oil on the Manufacturing Sector". Scottish Journal of Political Economy. 45 (5): 553–585. CiteSeerX . doi:10.1111/1467-9485.00112.
  31. Sisira Jayasuriya and Peter McCawley (2008), 'Reconstruction after a Major Disaster: Lessons from the Post-tsunami Experience in Indonesia, Sri Lanka, and Thailand', ADBI Working Paper No 125.
  32. "Venezuela – Exchange Rate". FocusEconomics. 24 August 2015.
  33. Evans-Pritchard, Ambrose (10 October 2016). "Britain should embrace weaker pound and it needs to fall further, says former BoE governor and currency guru". Telegraph. Retrieved 26 March 2017.
  34. Christensen, John; Shaxson, Nick; and Wigan Duncan (5 January 2016). The Finance Curse: Britain and the World Economy. The British Journal of Politics and International Relations.
  35. Kaminska, Isabella (12 October 2016). Brexit and Britain’s dutch disease. The Financial Times.
  36. Mody, Ashoka (18 November 2016). Unwinding of the pound carry trade. voxeu.org
  37. Krugman, Paul (11 October 2016). "Notes on Brexit and the Pound". The New York Times. Retrieved 13 October 2016.
  38. MacAskill, Andrew (24 March 2017). "How banks lost the ear of Britain's government over Brexit". Reuters. Retrieved 26 March 2017.
  39. Armstrong, Angus (14 October 2016). "Pound in your pocket". National Institute of Economic and Social Research. Retrieved 26 March 2017.
  40. Oliver, Steven; Jablonski, Ryan; Hastings, Justin V. (2017). "The Tortuga Disease: The Perverse Effects of Illicit Foreign Capital" (PDF). International Studies Quarterly. 61 (2): 312. doi:10.1093/isq/sqw051.

Further reading