Dutch Disease

Topics: International economics, Currency, Central bank Pages: 6 (1962 words) Published: November 24, 2012
(1.What is meant by the term?)

Over 50 years ago on 1960, when a sprawl bed of liquid gas was discovered in North Sea, Netherland overjoyed exploiting the natural resource and became a net exporter of gas. The demand for Dutch guilder in order to purchasing gas, rose and made it extremely strong. It left a lot of currency to a level the manufacturing export was no longer competitive.

Later on 1970, when oil price soured by 4 times; UK was tempted to invest in North Sea oil industry in Scotland. Soon after exporting the oil, UK encountered with a serious recession following labor strike. Firm workers demanded for higher wage because their disposal income has decreased which stemmed from the fall in expensive commodity demand. UK has become a net export of oil and Pound got appreciated. The rest of the industry left the market and firms started cutting their cost of human resources.

Since then the term of “Dutch Disease” assign to those with heavy reliance on their supply of natural resources that downturn the non-resource aspect of economy. The Export–oriented manufacturing system is divided to two parts; More competitive sector-normally energy sector- grow faster and further while the less competitive step back and the related employment fall substantially and in more serious crisis concludes to deindustrialization. Both mentioned event are correlated with exchange rate development.

The term of “Dutch disease” for the first time came in an article in The Economist -1977 that described the case as a natural resource curse. The name of Dutch Disease generally associated with a natural resource discovery, but it can be seen in any trade or investment activity that results in a large inflow of foreign currency, including a rise in natural resource prices, foreign aid, and foreign direct investment. The inflow of American treasures into Spain in 16th and gold discoveries in Australia in the 1850s are other two example of Dutch Disease diagnosis.

By 1978, this story repeated in Iran. The oil price jumped and other local product like hand crafts, carpets, agricultural product, minerals, precious stones, Zofran, Pistachio became expensive and was not affordable for the neighbors and other importers to import. Such small industries never sustained in the market and some of them wiped out. Iran became the importer of rice, wheat, carpets. That took many jobs and money out of economy.

Russia is likely to be another victim of this disease. Nearly 40% of GDP, 60% of export revenue and 60% of government revenue depends on oil and gas production. General perception of Russian economics, like other resource-rich countries, expects the symptom of disease. Russia as one of the main oil producer can easily impact on oil price by reducing or increasing the amount of production. In both situations, their intake of money from oil exportation is huge. It strengthens the Ruble and impact the export revenue as a whole.

Besides pouring unmanaged wealth problem, the direct investors intend to invest in mines and oil/gas wells and rigs or take over the related companies (direct investment). Moreover the related industry attracts the indirect investors to stock market to buy their shares. These all concludes to CAD appreciation which is not what a commercial sector of an economy try to reach at.Since we are on another side of history, revolution against energy consumption and climate change got more serious, the countries that are too dependent on natural resource are being questioned more than before. Except for short-run effect of asymmetric growth on resource allocation and income distribution, we are better to think about long-run issue of not renewable resource depletion rate and future plan for rich-resource countries.

(2.Detail and outline the channels that could cause such an effect) Dutch Disease Mechanism

The underlying mechanism of the Dutch disease is that the real exchange rate of the...
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