Dutch Disease

Definition

Dutch Disease is an economic phenomenon where the discovery and exploitation of a natural resource leads to a decline in other sectors of the economy, particularly manufacturing and agriculture. This situation often arises when a country experiences a significant influx of foreign currency due to resource exports, resulting in an appreciation of its currency and making other exports less competitive on the global market.

5 Must Know Facts For Your Next Test

1. Dutch Disease was first identified in the 1970s after the Netherlands discovered large natural gas reserves, which led to a decline in its manufacturing sector.
2. Countries experiencing Dutch Disease may see their currencies appreciate, making their other export industries less competitive on the global market.
3. The effects of Dutch Disease can lead to job losses in non-resource sectors, creating economic instability and increased reliance on resource revenues.
4. Governments may implement policies aimed at economic diversification to mitigate the negative impacts of Dutch Disease and sustain long-term growth.
5. Research suggests that countries can avoid Dutch Disease by adopting sound fiscal policies and investing resource revenues into education and infrastructure.

Review Questions

• How does Dutch Disease affect a country's economic structure, particularly regarding resource management?
  • Dutch Disease can drastically alter a country's economic structure by shifting focus and resources away from manufacturing and agriculture toward the resource sector. As natural resources are exploited, an influx of foreign currency can lead to currency appreciation, causing other sectors to struggle in the global market. This imbalance can create long-term challenges for sustainable growth and resource management as reliance on volatile resource revenues increases.
• What are some strategies that governments can implement to counteract the effects of Dutch Disease?
  • Governments can employ several strategies to mitigate the effects of Dutch Disease, such as implementing sound fiscal policies that promote savings from resource revenues. Investing in education and infrastructure can help diversify the economy by enhancing the capabilities of other sectors. Additionally, promoting innovation and supporting small businesses can foster a more resilient economy that is less dependent on resource extraction.
• Evaluate the broader implications of Dutch Disease for developing countries rich in natural resources and how it influences global trade dynamics.
  • Dutch Disease presents significant challenges for developing countries rich in natural resources as it can lead to economic imbalances and hinder overall development. When these countries become overly reliant on resource exports, they risk losing competitiveness in other areas, impacting their trade relationships and economic stability. This reliance can also influence global trade dynamics by contributing to price volatility and creating an environment where wealth is concentrated, ultimately perpetuating inequality both within these countries and in their trading partners.

Related terms

Resource Curse: A paradox where countries rich in natural resources experience less economic growth and worse development outcomes than countries with fewer natural resources.

Currency Appreciation: An increase in the value of one currency relative to another, which can make exports more expensive and imports cheaper.

Economic Diversification: The process of a country or region expanding its range of economic activities to reduce dependence on a single sector or resource.