Dutch Disease

BIBLIOGRAPHY

The term Dutch disease refers to the adverse effects on manufacturing industries that took place in the Netherlands with the natural gas discoveries of the 1970s and the process of real currency appreciation that followed. Similar “illnesses” affected several oil-exporting countries following the oil price shocks of the 1970s, providing further motivation to a growing literature on the subject. In this literature a natural resource boom comes close to being a curse because specialization in natural resource intensive goods can be harmful to long-term growth.

Indeed, the development of a natural resource intensive export sector can crowd out the manufacturing sector through a number of mechanisms. First, the expansion of the natural resource sector raises labor demand in this sector, thus increasing the wage in manufacturing and reducing its profitability. The profitability squeeze in manufacturing slows down capital accumulation and growth. Second, the increase in natural resource rents generates a higher demand for nontradable goods (the spending effect in Corden 1984), which leads to a higher relative price of nontradables and thus to real currency appreciation. The higher demand for and prices of nontradables leads to a reallocation of labor away from manufacturing and into services. Third, the fall in profitability in manufacturing (especially if the nontradable sector produces inputs for manufacturing) will cause capital to move into the nontradable goods sector and the resource intensive sector. This is indirect deindustrialization because it results from the real currency appreciation caused by the spending effect and depends on its strength (see Corden 1984; Corden and Neary 1982). Finally, the increase in land endowment or in the prices of the natural resource will create an increase in the profitability of capital invested in the resource intensive sector, causing capital to move away from manufacturing and into the resource intensive sector. This resource movement is labeled “direct deindustrialization” because it is independent of real currency appreciation.

The contraction of manufacturing through each of these mechanisms may make a country worse off in the long run because manufacturing industries are those with the most externalities and rapid technical progress (Matsuyama 1992). This may happen even if the resource boom is temporary. Temporary resource booms can lead to a long-term loss of competitiveness and a lower level of per capita income than would have been the case in the absence of the resource boom (Krugman 1987).

SEE ALSO Imports; Inflation; Stagflation

BIBLIOGRAPHY

Corden, W. Max. 1984. Booming Sector and Dutch Disease Economics: Survey and Consolidation. Oxford Economic Papers 36 (3): 359–380.

Corden, W. Max, and J. Peter Neary. 1982. Booming Sector and Deindustrialization in a Small Open Economy. Economic Journal 92: 825–848.

Krugman, P. R. 1987. The Narrow Band, the Dutch Disease, and the Competitive Consequences of Mrs. Thatcher. Journal of Development Economics 27: 41–55.

Matsuyama, K. 1992. Agricultural Productivity, Comparative Advantage, and Economic Growth. Journal of Economic Theory 58: 317–334.

Jaime Ros