Dutch Disease

Topics: Dutch disease, International economics, Exchange rate Pages: 1 (625 words) Published: September 22, 2014
Today we present our paper on a phenomenon called “Dutch Disease,” that tries to explain changes in growth of an economy in the presence of a favorable shock. While it most often refers to natural resource discovery, it can also be extended to include "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."[1] The term was coined in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959.[2]

The theory asserts that an increase in revenues from natural sources will de-industrialize a nation's economy by appreciating the real exchange rate, which makes the tradable sector less competitive. Corden and Neary (1982) modeled this idea and explained Dutch Disease as "adverse effect on non-booming sector due to booming sector." In their model, there are non-traded (services sector - transport, financial services, etc) and two traded goods sectors (booming and non-booming). The non-booming sector is agriculture and manufacturing sectors.[3] There has been research into the Dutch Disease effect and this has shown one perplexing result: Why do some countries experience the negative effects of Dutch Disease while others seem to avoid the Resource Curse; for eg: Norway’s success and UK’s failure despite conditional similarities of their oil discoveries.

The classic model depicting Dutch Disease was created by two economists (W. Max Corden and J. Peter Neary) in 1982. In this model there in one non-traded goods sector (services etc.) and two traded goods sectors, one is booming and the other is lagging. The booming sector usually arises from the exploitation of natural gas and oil but has also been referred to other natural resources such as minerals (cooper, gold etc.). The lagging sector is almost always the manufacturing sector.

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