What is Dutch Disease?


Who came up with the Dutch disease?

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.

How is Dutch disease related to the resource curse?

The ‘Dutch disease’, a phenomenon frequently referred to in ‘resource curse’ literature, was first used to describe the Dutch economic experience where the manufacturing sector declined and suffered general inflation as a result of the booming natural gas sector.

What are the political and governance implications of Dutch disease?

The political implications of high revenues from oil lead to a culture of rent seeking and distortion of institution, which in combinations with high relative prices (a direct impact of the Dutch Disease) create an unfavourable situation for economic development.

Which country were the Dutch belong to?

Over time, English-speaking people used the word Dutch to describe people from both the Netherlands and Germany, and now just the Netherlands today.

What is real exchange rate in economics?

WHAT IS THE REAL EXCHANGE RATE? The real exchange rate (RER) between two currencies is the nominal exchange rate (e) multiplied by the ratio of prices between the two countries, P/P*.

Why do Dutch disease happen?

Although Dutch 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.

How can we avoid Dutch disease in Ghana?

How to Prevent or Overcome Dutch Disease:

  1. Ghana can limit its real exchange rate by purchasing US bonds to keep the value of the Ghana Cedi lower.
  2. Ghana can reduce foreign capital flows to limit the rise in exchange rate.
  3. Spend proceeds of oil revenue on infrastructure and education.

Does the Netherlands have natural resources?

Natural resources: natural gas and petroleum ( North Sea drillings), peat, limestone, salt, sand and gravel.

Does Australia have Dutch disease?

The estimation found evidence of Dutch disease in Australia. The commodity price shock increased the real exchange rate by 1.2% point more than five years, which had immediate positive effect on the level domestic real GDP and resource output.

What is Dutch disease specifically in a Canadian context?

The term Dutch disease refers to the phenomenon whereby a country’s specialization in the exploitation and export of natural resources leads to the appreciation of its currency and the subsequent decline of its manufacturing sector.

Who benefits when a country’s currency appreciates?

Currency appreciation usually reduces inflation because imports become cheaper and the lower prices lead to lower inflation. It makes imports more attractive, causing the demand for local products to fall. Local companies usually have to cut costs and increase productivity so they can remain competitive.

How did Norway avoid Dutch disease?

This has been called as a light Dutch disease” by Ole Gunnar Austvik of the Norwegian Business School. Recognizing this problem, Norwegian policymakers informally slowed down oil production and investments in the 1970s in order to avoid negative impacts on the economy at large.

What is meant by Immiserizing growth?

Immiserizing growth is a long-term phenomenon that occurs when the gain in a country’s social welfare arising from economic growth is more than offset by the loss in such welfare associated with an adverse shift in the terms of trade.

What is Dutch Disease?

Are Dutch disease and resource curse the same?

This view now stands challenged by a number of studies that demonstrate the existence of a resource curse slower growth and poorer economic performance in natural resource rich countries. The traditional explanation for the resource curse is the Dutch Disease or deindustrialization.

What is Dutch disease Why do many real world examples of Dutch disease originate from developments in energy products?

Dutch disease is a shorthand way of describing the paradox which occurs when good news, such as the discovery of large oil reserves, harms a country’s broader economy. It may begin with a large influx of foreign cash to exploit a newfound resource.

What is meant by rent seeker?

Rent seeking (or rent-seeking) is an economic concept that occurs when an entity seeks to gain added wealth without any reciprocal contribution of productivity. Typically, it revolves around government-funded social services and social service programs.

Did Norway escape the resource curse?

After catching- up with its neighbors, Norway surprisingly maintained a higher pace, and appears to have escaped the curse and the disease.

How can we prevent Dutch disease?

How to Prevent Dutch Disease

  1. Limit the rise in the real exchange rate. …
  2. Reduce foreign capital flows. …
  3. Spend proceeds of oil revenue on infrastructure and education. …
  4. Immigration. …
  5. Sovereign wealth funds. …
  6. Greater equality of distribution. …
  7. Higher tax on luxury services and luxury imports.

What happens if a country devalues its currency?

Devaluation reduces the cost of a country’s exports, rendering them more competitive in the global market, which, in turn, increases the cost of imports. If imports are more expensive, domestic consumers are less likely to purchase them, further strengthening domestic businesses.

What is a two speed economy?

A ‘two-speed economy’ occurs where one sector of industry or business grows at a much more rapid rate than another often masking the slow rate of growth in the smaller sector.

What is the natural resource trap?

The resource trap, or resource curse, as called by the Natural Resource Governance Institute (NRGI), posits that resource-rich countries tend to have higher rates of conflict and authoritarianism combined with lower rates of economic stability and economic growth.

What is the Pitchford thesis?

Back in the 1980s, an Australian economist named John Pitchford made the counterintuitive case – now known as the “Pitchford thesis” – that market-driven countries should learn to love current account deficits. He was persuasive, especially at home, sending Australia in precisely the opposite direction to Canada.

What happens when Norway runs out of oil?

The Norwegian Oil and Gas Association has calculated that shutting down Norway’s petroleum industry from 2020 would mean the loss of NOK 140 billion in annual government revenues. It also estimates that around 300 000 people employed in the country directly and indirectly by the industry would lose their jobs.

Does Russia have Dutch disease?

This movement has managed to keep Russia’s current account from dangerous deficit levels. Yet, despite this, Russia remains wedded to the fortunes of oil and gas. Dutch disease, that nasty virus that attacks resource rich countries, is still in Russia’s blood.

What are the symptoms of Dutch disease?

We then discuss the symptoms of Dutch Disease, which include (1) real exchange rate appreciation; (2) slower manufacturing growth; (3) faster service sector growth; and (4) higher overall wages.

How has Dutch disease damaged the Nigerian economy generally?

Nigeria, over the years, has been showing a rapid appreciation of the domestic currency, a rise in real wages and the service sector and a slow-down in the industrial production which are all signs of presence of Dutch disease which predicts that a country with large natural resource rents may experience a de- …

Does foreign aid cause Dutch disease?

Rajan and Subramanian indeed find evidence that foreign aid causes Dutch Disease. In the 1980s and 1990s, the more aid a country received, the less growth (or more shrinkage) it saw in industries that tend to export the most.

What causes capital flight to happen?

Capital flight is a large-scale exodus of financial assets and capital from a nation due to events such as political or economic instability, currency devaluation or the imposition of capital controls.

What happens if a country’s currency depreciates?

Currency depreciation, if orderly and gradual, improves a nation’s export competitiveness and may improve its trade deficit over time. But an abrupt and sizable currency depreciation may scare foreign investors who fear the currency may fall further, leading them to pull portfolio investments out of the country.

Do aid inflows cause Dutch disease a case study of the CFA franc countries?

Using dynamic panel analysis we find that foreign aid inflows do not generate Dutch disease effects in these countries. In terms of policy recommendation our results suggest that CFA countries can still receive aid without fear of harming their competitiveness.

Why are the resource curse and Dutch disease detrimental to a country?

Dutch disease: A large increase in natural resource revenues can hurt other sectors of the economy, particularly export-based manufacturing, by causing inflation or exchange rate appreciation and shifting labor and capital from the non-resource sector to the resource sector (see revenue management reader).

Why would a country revalue its currency?

Revaluation, which makes a currency more expensive, might be undertaken in an effort to reduce a current account surplus, where exports exceed imports, or to attempt to contain inflationary pressures.