What Is Dutch Disease?

Summary

Dutch Disease refers to the negative economic impact that can arise when a country discovers or exploits a valuable natural resource. This phenomenon typically leads to a rising currency, making non-resource exports less competitive and causing unemployment in other sectors. Historically, countries like the Netherlands, the UK, Canada, and Russia have experienced these challenges, as their newfound wealth from resource exploitation resulted in economic downturns in non-resource industries. Key takeaways include the paradox of good news harming the economy, an influx of foreign capital, and the decline in competitiveness of other sectors.

Takeaways

• 😀 Dutch Disease refers to the negative economic impact that arises from the sudden discovery or exploitation of valuable natural resources.
• 😀 It results in a currency appreciation that makes non-resource-based industries less competitive, leading to a drop in exports and increased unemployment.
• 😀 A second effect is the decline of other sectors, such as manufacturing, as jobs may shift to countries with lower costs.
• 😀 The term 'Dutch Disease' was coined in 1977 by *The Economist* to describe a crisis in the Netherlands caused by the discovery of natural gas.
• 😀 The newfound wealth from resource-based industries can cause an overvaluation of the local currency, making exports from other industries uncompetitive.
• 😀 The Netherlands experienced Dutch Disease after the discovery of vast natural gas reserves, causing a surge in the value of the Dutch guilder.
• 😀 In the 1970s, the United Kingdom also faced Dutch Disease following the quadrupling of oil prices and the extraction of North Sea oil.
• 😀 Despite the oil boom, the UK fell into recession due to the appreciation of the pound, which made its other exports less competitive.
• 😀 Countries like Canada and Russia have faced similar issues, as oil exploitation led to overvalued currencies and reduced manufacturing competitiveness.
• 😀 Key symptoms of Dutch Disease include a rising currency value, a decline in non-resource-based exports, and a loss of jobs to countries with lower production costs.

Q & A

What is Dutch disease?

Dutch disease is an economic phenomenon where the discovery or exploitation of a valuable natural resource negatively impacts a nation's economy, particularly through the overvaluation of its currency.

What are the two main economic effects of Dutch disease?

The two main effects are: 1) The sudden spike in currency value harms the competitiveness of non-resource-based industries, leading to decreased exports and higher unemployment. 2) The wealth generated by resource-based industries can cause a decline in other sectors, like manufacturing, often due to job shifts to lower-cost countries.

How does Dutch disease affect a nation's currency?

Dutch disease causes a sharp rise in the value of the local currency, which makes exports of non-resource-based products more expensive and less competitive in global markets.

What historical event led to the coining of the term 'Dutch disease'?

The term 'Dutch disease' was first coined by The Economist magazine in 1977 when analyzing the economic impact of the Netherlands discovering vast natural gas deposits, which led to an economic downturn despite the newfound wealth.

How did Dutch disease affect the Netherlands in the 1970s?

In the 1970s, after the discovery of natural gas, the Dutch guilder appreciated sharply, making Dutch exports less competitive, leading to rising unemployment and decreased capital investment, ultimately causing an economic downturn.

What happened in Great Britain related to Dutch disease in the 1970s?

In the 1970s, after the price of oil quadrupled, the extraction of North Sea oil became economically viable. However, the appreciation of the British pound led to higher wages, reduced competitiveness in exports, and a subsequent recession.

Which countries have recently experienced concerns over Dutch disease?

In more recent years, Canada and Russia have experienced concerns over Dutch disease, primarily due to foreign capital influx from oil exploitation, leading to an overvalued currency and reduced manufacturing competitiveness.

What are the symptoms of Dutch disease?

Symptoms of Dutch disease include a rising currency value that leads to a decrease in exports and a loss of jobs as industries move to lower-cost countries.

Why is Dutch disease considered paradoxical?

Dutch disease is paradoxical because it describes a situation where the discovery of valuable resources, such as oil, which should be a positive event, ends up harming a country's broader economy due to its negative effects on other sectors.

How does the influx of foreign capital contribute to Dutch disease?

An influx of foreign capital to exploit a newfound resource, such as oil, can cause the local currency to overvalue, which in turn harms the competitiveness of other industries, particularly in manufacturing and exports.