Dutch disease in economics refers to a phenomenon in which a country experiences uneven growth in all sectors due to the discovery of natural resources, especially large oil reserves. According to the concept, when a country discovers natural resources and begins to export them to the rest of the world, it causes a significant appreciation of the exchange rate of the currency, which, in turn, discourages exports from other sectors. while encouraging the import of cheaper alternatives.
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.
The origin of the term
In the 1960s, the Netherlands discovered gas reserves in the North Sea. The ensuing 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 plummeted. As a result, over the years, the country has experienced a downturn in the industrial sector.
According to a recent research article entitled “40 years of literature on the Dutch disease: lessons for developing countries”, by Edouard Mien and Michael Goujon, the framework of the model of the phenomenon is based on three sectors: energy (traditionally oil, gas or mining resources), tradable and non-tradable goods of a small economy. As labor and capital are internationally immobile, Dutch Disease is a “purely domestic phenomenon” that cannot be “exported”.
The model focuses on the effects of expenditures and resource movements. In other words, energy exports generate additional revenue for the factory owner and the government (through taxes), thereby increasing the demand for tradable and non-tradable products in the country. The boom in the energy sector is forcing labor out of the trade and service sectors, creating a labor shortage in these two sectors. This reduces output in the trade and services sector due to the gap between supply and demand. In the end, the output of the commerce sector declines and the service sector stagnates, which causes the economy to fall in the long run.
However, there are theories that contradict this model. For example, Fredrick van der Pleog in 2011 explained that if the trade or manufacturing sector is more capital intensive than the service sector, then the boom in the energy sector will be shifted to the trade sector, leading to a fall. absolute of the service sector. .
How to fight Dutch disease
Mien and Goujon also focus on what resource-rich developing countries should do to avoid the onset of Dutch disease.
First, the role of fiscal policy can prevent the harmful effects of Dutch disease. According to the researchers, the role of fiscal policy is important in controlling the boom following the discovery of natural resources. Rising revenues from the export of natural resources should be adjusted by prudent spending on public welfare. The study focuses on the effective use of income from taxation to offset the harmful effects of Dutch disease.
The second important step is to promote spending policies. Government spending such as concentrating on imports of tradables rather than non-tradables would help slow the impact of Dutch disease. Private spending aimed at improving the productivity of private firms would also help reduce the impact.
Third, monetary policy. The choice of an appropriate monetary policy is important for the macroeconomic management of commodity exporting countries. With the discovery of natural resources, the country sees a huge influx of money, especially foreign currency. The export of natural resources tends to affect the balance of money markets and exchange rates. Dutch disease can be avoided if the central bank increases the reserve requirements of the banking system, which reduces domestic credit.