Dutch disease

Natural gas NL

Dutch disease is an economic concept that describes the negative consequences arising from a spike in the value of a nation's currency, often following the discovery of large natural resources, such as oil or gas. 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.

Mechanism

The primary mechanism of Dutch disease involves the appreciation of the national currency, which makes the country's other exports more expensive and less competitive on the global market. This can lead to a decline in the manufacturing sector and other tradable goods sectors, while the non-tradable goods sector, such as services, may expand.

Resource Boom

A resource boom, such as the discovery of natural gas or oil, leads to an influx of foreign currency. This increases the demand for the domestic currency, causing it to appreciate. The appreciation of the currency makes exports more expensive and imports cheaper, which can harm the manufacturing sector.

Spending Effect

The increased revenue from the resource boom can lead to higher government spending and increased consumption. This can cause inflation and further appreciation of the currency, exacerbating the negative effects on the manufacturing sector.

Symptoms

The symptoms of Dutch disease include:

• A rise in the value of the national currency.
• A decline in the manufacturing sector.
• An increase in the service sector.
• Inflation due to increased spending.

Examples

Several countries have experienced Dutch disease, including:

• Netherlands: Following the discovery of natural gas in the 1960s.
• United Kingdom: After the discovery of North Sea oil in the 1970s.
• Norway: Despite managing its oil wealth through the Government Pension Fund of Norway, it has faced challenges related to Dutch disease.

Mitigation Strategies

Countries can adopt several strategies to mitigate the effects of Dutch disease, including:

• Establishing sovereign wealth funds to manage resource revenues, such as the Government Pension Fund of Norway.
• Diversifying the economy to reduce dependence on natural resources.
• Implementing policies to support the manufacturing sector.

See Also

• Resource curse
• Economic diversification
• Sovereign wealth fund
• Inflation