What Is The Dutch Disease? Origin of Term and Examples

GP Sir
Posted by GP Sir 7 months Ago

What is Dutch Disease?

The Dutch Disease is an economic phenomenon that occurs when a country experiences a rapid increase in revenue from natural resource exports, leading to a decline in other industries, such as manufacturing and agriculture. The term was coined in the 1970s after discovering large natural gas deposits in the Netherlands and the subsequent impact on their economy. However, Dutch Disease has been observed in various countries worldwide, including Africa, South America, and Asia.

Origin of the Term:

The Economist magazine coined the term “Dutch Disease” in 1977 to describe the economic consequences of the Netherlands’ discovery of a natural gas field in the North Sea. The Dutch government used the revenue from gas exports to strengthen the guilder, making Dutch exports more expensive and less competitive. As a result, manufacturing and other export industries suffered, giving rise to the term “Dutch Disease.”

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Examples of Dutch Disease

Dutch Disease has been observed in various countries, with different natural resources triggering the phenomenon. Some examples include:

  1. Venezuela: The country’s economy relies heavily on oil exports, which account for over 95% of export earnings. The boom in oil prices in the 1970s and 1980s led to a rapid revenue increase and a decline in other sectors. The manufacturing sector, for example, declined from 15% of GDP in the 1970s to less than 5% in 2017.
  2. Nigeria: The country’s economy heavily depends on oil exports, which account for over 90% of its export earnings. The boom in oil prices in the 1970s and 1980s led to a decline in the agricultural sector, which had been the mainstay of the economy.
  3. Chile: The country’s economy heavily depends on copper exports, which account for over 50% of its export earnings. The boom in copper prices in the 1970s led to a decline in other sectors, such as manufacturing and agriculture.
  4. Nepal: There are examples of Dutch Disease in Nepal, particularly in relation to the country’s reliance on remittances as a major source of foreign exchange. Remittances have played a crucial role in Nepal’s economy, accounting for about a third of the country’s GDP. However, the over-reliance on remittances has created a phenomenon known as “remittance dependence syndrome,” which has led to several economic imbalances.One example of the Dutch Disease in Nepal is the exchange rate appreciation. With a high inflow of remittances, the demand for Nepalese rupees increases, increasing the exchange rate. This, in turn, makes Nepalese exports more expensive and less competitive in the international market, leading to a decline in export earnings. This creates an imbalance in the economy, with remittances accounting for a large portion of the foreign exchange earnings while export earnings decline.Another example is the impact on the labor market. With remittances providing a reliable source of income, many young people opt out of the labor force, leading to a shortage of skilled workers. This can negatively affect the long-term growth and development of the economy.

    Furthermore, the dependence on remittances has also led to a decline in domestic savings and investment. As people receive money from abroad, they tend to spend it on consumption rather than investment, leading to a lack of capital formation and investment in productive sectors of the economy.

Merits of the Dutch Disease:

The Dutch Disease can have some positive effects, such as:

  1. Increased revenue from natural resource exports can increase government spending on social programs and infrastructure development.
  2. It can create job opportunities in the natural resource sector, such as oil and gas exploration and mining.
  3. It can lead to new industries supporting the natural resource sector, such as transportation and logistics.

Demerits of the Dutch Disease:

However, the Dutch Disease also has several negative consequences, such as:

  1. A decline in other sectors of the economy can lead to a loss of jobs and a decline in economic growth.
  2. Heavy reliance on natural resource exports makes the economy vulnerable to fluctuations in commodity prices.
  3. It can lead to a decline in the competitiveness of other export industries, such as manufacturing and agriculture, as the country’s currency appreciates.
  4. It can also lead to a rise in inflation, as the increased revenue from natural resource exports increases the money supply.

Conclusion

The Dutch Disease is a phenomenon that can positively and negatively affect an economy. While increased revenue from natural resource exports can lead to increased government spending and job creation, heavy reliance on these exports can lead to a decline in other sectors and leave the economy vulnerable to external shocks. Countries need to diversify their economies and invest in other sectors to mitigate the negative effects of Dutch Disease.

References:

  1. Corden, W.M. and J.P. Neary. “Booming sector and de-industrialization in a small open economy.” The Economic Journal, vol. 92, no. 368, 1982, pp. 825-848. doi: 10.2307/2232670.
  2. Frankel, Jeffrey A. “The natural resource curse: A survey.” National Bureau of Economic Research, Working Paper No. 15836, 2010. doi: 10.3386/w15836.
  3. Gylfason, Thorvaldur. “Natural resources, education, and economic development.” European Economic Review, vol. 45, no. 4-6, 2001, pp. 847-859. doi: 10.1016/S0014-2921(01)00136-X.
  4. Hausmann, Ricardo, et al. “The curse of riches: Natural resources, rent-seeking, and economic growth.” Brookings Papers on Economic Activity, vol. 1999, no. 2, 1999, pp. 1-67. doi: 10.2307/2534670.
  5. Kaldor, Nicholas. “The case for regional policies.” Scottish Journal of Political Economy, vol. 17, no. 3, 1970, pp. 337-348. doi: 10.1111/j.1467-9485.1970.tb00647.x.
  6. Sachs, Jeffrey D. and Andrew M. Warner. “Natural resource abundance and economic growth.” National Bureau of Economic Research, Working Paper No. 5398, 1995. doi: 10.3386/w5398.
  7. United Nations Development Programme. “Human Development Report 2021.” UNDP, 2021. https://hdr.undp.org/en/content/2021-human-development-index-ranking.
  8. World Bank. “World Development Indicators 2022.” World Bank, 2022. https://databank.worldbank.org/source/world-development-indicators.