Dutch Disease

In Context 

• Recently the research paper titled “40 years of Dutch Disease literature: lessons for developing countries”, was published by Edouard Mien and Michael Goujon.

More about Dutch Disease:

• Meaning:
  • Dutch Disease in economics refers to a phenomenon wherein a country witnesses uneven growth across sectors due to the discovery of natural resources, especially large oil reserves. 
  • According to the concept, when a country discovers natural resources and starts exporting them to the rest of the world, it causes the exchange rate of the currency to appreciate significantly and this, in turn, discourages the exports from other sectors while encouraging the import of cheaper alternatives.
  • It exhibits the following two chief economic effects:
    • It decreases the price competitiveness of exports of the affected country’s manufactured goods.
    • It increases imports.
• In long run:
  • These factors can contribute to unemployment, as manufacturing jobs move to lower-cost countries. 
  • Meanwhile, non-resource-based industries suffer due to the increased wealth generated by resource-based industries.
• Origin:
  • While the idea was first proposed by economists Peter Neary and Max Corden in 1982, the term ‘Dutch disease’ was first coined by The Economist in 1977 to describe the decline of the manufacturing industry in the Netherlands.
  • What happened in the Netherlands?
    • In the 1960s, the Netherlands discovered gas reserves in the North Sea. 
    • The subsequent export of oil and the appreciation of the Dutch currency made Dutch exports of all non-oil products less competitive on the world market. 
    • Unemployment rose from 1.1% to 5.1% and capital investment in the country dropped. 
    • Following this, over the years, the country witnessed a downfall in the industrial sector.

How to combat Dutch Disease?

• Role of fiscal policy: 
  • Rising income due to the export of natural resources should be adjusted with cautious spending on public welfare. 
  • There should be an efficient use of revenues coming from taxation to compensate for the adverse effects of the Dutch disease.
• Promoting spending policies: 
  • Public spending such as concentrating on imports of tradeable rather than non-tradeable would help slow the impact of the Dutch disease. 
  • Private spending in order to improve the productivity of private firms would also help reduce the impact.
• Monetary policy: 
  • With the discovery of natural resources, the country sees a huge inflow of money, especially foreign currency. 
  • The export of natural resources tends to affect the equilibrium in the money and exchange rate markets. 
  • The Dutch disease can be prevented if the central bank raises the banking system reserve’s requirement, which decreases domestic credit.

Source: TH