The main thematic areas of economic effects from the countries identified in the literature synthesis were then analyzed using trend analysis from a time series of economic variables for each country to represent the respective thematic areas. The trends were then discussed against the theoretical literature on https://1investing.in/. The trend analysis was then extended to the country of Guyana which is on the verge of an oil boom, primarily to identify if the synthesis can provide any possible indications of potential Dutch Disease effects for the country. The synthesis predominantly showed the impacts of Dutch Disease to manufacturing which had a cyclical and downward trend in its contribution to Gross Domestic Product and impacts to the value of the agricultural sector.

1. For centuries, the indigenous peoples of the GCC region have toiled in arguably the toughest conditions known to man, a far cry from the temperate conditions and fertile lands of the Netherlands.
2. A resource boom is assumed to increase wealth, but by reducing output and employment in other sectors through DD effects, the aggregate positive impact on the economy is likely to be lower than expected.
3. Some of the prevention methods include reducing the pace of appreciation of the home currency, increasing national savings, and investing in high-quality production elements.
4. But, the government will often cut other taxes and come to rely on oil tax revenues.
5. The presumed mechanism is that while revenues increase in a growing sector (or inflows of foreign aid), the given economy’s currency becomes stronger (appreciates) compared to foreign currencies (manifested in the exchange rate).

First, it appears that the distinction between agriculture and manufacturing as the main exportable sector is important when investigating the presence of DD, especially in developing countries. Many empirical studies find evidence of an appreciation effect without evidence of a decline in non-resource tradable sectors, which supports the idea that DD might not be a disease for the real economy. Finally, and paradoxically, empirical studies using large panels of countries tend to support DD, while country-case analyses generate more mixed results (see Table 2).

This sterilization can be achieved by raising the banking system’s reserves requirement, which decreases domestic credit and compensates for the increase in the NFA-backed supply of money. It is also worth noting that a resource-movement effect can occur in every type of exchange rate regime. The term “Dutch disease” was first used by the Journal The Economist (1977) to explain the industrial decline observed in the Netherlands after gas reserves discoveries in the North Sea during the 1960s, then in the UK, and Australia and afterwards in many other countries.

Also important is the length of statistical series which can be too short to properly test for long run predictions. A third reason is that, given statistical issues, test results are sensitive to the empirical methodology, the choice of the dependent and explanatory variables, or the length of the modeled lag between the boom and the DD effects. These new findings show that not just an overvalued exchange rate, but high inequality and political instability also weaken the immune system of resource-rich economies and give rise to Dutch disease. Devaluing a currency may not suffice to rekindle exporting sectors if income inequality and political instability are the true underlying problems. In many cases, unequal distribution of resource rents also lie at the center of the political instability, creating additional complications.

Another strategy is for the government to boost subsidies or tariffs in the underperforming industry. However, because big inflows of foreign money are often given by the export sector and purchased by the import sector, this might exacerbate the consequences of Dutch disease. The term has become popular in economic circles to describe the paradoxical scenario in which seemingly positive news, such as the discovery of enormous oil reserves, has a detrimental influence on a country’s overall economy.

We explained the puzzle by pointing to the high value of the guilder, then the Dutch currency. Gas exports had led to an influx of foreign currency, which increased demand for the guilder and thus made it stronger. Gas extraction was (and is) a relatively capital-intensive business, which generated few jobs. And in an attempt to stop the guilder from appreciating too fast, the Dutch kept interest rates low. That prompted investment to rush out of the country, crimping future economic potential. Mexico has drawn most of the attention in the empirical literature on DD in Latin America.

Publication: Demystifying Dutch Disease

For example, Egert (2012) uses the methodology of Égert and Leonard (2008) on a panel of 22 resource-rich post-soviet countries in Central and South-West Asia. This study does not support the DD theory since the relationship between oil prices and the RER is insignificant in oil-exporters in the short run. Égert, however, recognizes that this result may be sensitive to the number of lags in the regressions, in line with Kutan and Wyzan (2005)’s results for Kazakhstan. Neary and Purvis (1982) propose a combination of the Buiter–Purvis (1980) and Corden–Neary (1982) models.

Dutch disease: An economic illness easy to catch, difficult to cure

The magnitude of this effect depends on the level of real wages’ flexibility, but overall employment increases in N and decreases in T. Immigration lowers the increase in wages, but increases the supply and the demand for N and T, with an ambiguous effect on the RER. What a persistently low oil price does to oil-rich countries is like what a long, cold winter does to people.

The false promise of Indonesia’s economy

A fixed exchange rate delays the adjustment (the domestic price of T is fixed), but the trade surplus gradually increases the money supply (if not sterilized), causing inflationary pressures. The real appreciation is now obtained through a rise in the price of N instead in a fall in the price of T. Overall, there is strong empirical evidence that DD is a reality and should be considered seriously by resource-rich developing countries.

Random Glossary term

DD has been studied for 40 years but is still the object of theoretical, empirical, and policy debates. First, we focus on developing countries, because most of the recent empirical literature on DD has targeted these countries. Finally, while they argue that DD is the exception rather than the rule, we find more mixed conclusions. We also consider the conditions which allow or prevent DD, and the public policies that can be implemented against it. Economists have long known that large resource discoveries could be harmful to economies in the long-term, a phenomenon that was named Dutch disease following the effects of the Netherlands’ gas discovery in the North Sea.

Other research suggests that distributing the resource revenues directly to people can help these countries get out of such a low-level political-economy condition and address a host of problems, including inefficiencies in labor markets and the public sector. The same political economy factors, however, also make the application of this idea difficult. The elites in these countries often cling to their monopoly power over the control of natural resources. Public service jobs, subsidies, and other forms of transfers are typically geared to ensure political clout and survival. Therefore, in most cases, not only a sound macroeconomic framework, but also a deep transformation of the state-society relationship is paramount to curing the disease. Transferring at least a share of the revenues directly to people would be a good start.

The newfound wealth and massive exports of oil caused the value of the Dutch guilder to rise sharply, making Dutch exports of all non-oil products less competitive on the world market. Unemployment rose from 1.1% to 5.1%, and capital investment in the country dropped. Simple trade models suggest that a country should specialize dutch disease in industries in which it has a comparative advantage; thus a country rich in some natural resources would be better off specializing in the extraction of those natural resources. IN 1959 geologists discovered 2.8trn cubic metres of natural gas—the largest field in Europe—under the city of Groningen in the Netherlands.

The “curse” or “disease” concepts are arguably as negative as each other, but DD, contrary to resource curse, should not be analyzed as an inherently growth-reducing phenomenon but rather as a driver of structural transformation. Due to the increased wealth and spending on services, there will be higher demand for service sector workers (waiters, hairdressers, chauffeurs e.t.c). This will cause rising real wages in the economy, causing another problem for manufacturing firms as they have to increase real wages to retain workers. The presumed mechanism is that while revenues increase in a growing sector (or inflows of foreign aid), the given economy’s currency becomes stronger (appreciates) compared to foreign currencies (manifested in the exchange rate). This results in the country’s other exports becoming more expensive for other countries to buy, while imports become cheaper, altogether rendering those sectors less competitive.