Dutch disease

Definition

Dutch disease is an economic phenomenon that occurs when a country's increased wealth from natural resources leads to a decline in other sectors, particularly manufacturing and agriculture. This situation can result in currency appreciation, making exports less competitive and imports cheaper, ultimately harming the overall economy. The term originated from the negative economic consequences experienced by the Netherlands in the 1960s after discovering natural gas reserves.

5 Must Know Facts For Your Next Test

1. Dutch disease often leads to an overreliance on the resource sector, causing neglect of other vital industries like manufacturing and agriculture.
2. Countries experiencing Dutch disease may see job losses in non-resource sectors as labor and investment shift towards the booming resource industry.
3. This phenomenon can create economic volatility, as resource prices fluctuate due to global market conditions.
4. Policymakers can mitigate Dutch disease by implementing strategies such as investing in education and diversifying the economy.
5. The long-term effects of Dutch disease can hinder sustainable economic growth and development, particularly in newly independent states relying on natural resources.

Review Questions

• How does Dutch disease affect the balance between different economic sectors in a country?
  • Dutch disease impacts the balance between various economic sectors by causing a shift of resources, labor, and investment toward the booming resource sector at the expense of manufacturing and agriculture. As the resource sector flourishes, other industries may struggle to compete due to currency appreciation, resulting in job losses and reduced productivity outside of resources. This sectoral imbalance can undermine overall economic health and sustainability.
• Discuss the potential long-term consequences of Dutch disease for newly independent states that rely heavily on natural resources.
  • The long-term consequences of Dutch disease for newly independent states relying on natural resources include economic volatility, decreased competitiveness of non-resource sectors, and vulnerability to global market fluctuations. As these states become overly dependent on their resource wealth, they risk neglecting essential investments in education and infrastructure needed for diversified growth. This can lead to stagnation or decline in other critical industries, ultimately hindering overall development and prosperity.
• Evaluate strategies that newly independent states could adopt to counteract the effects of Dutch disease and promote balanced economic growth.
  • To counteract Dutch disease, newly independent states could adopt strategies such as establishing sovereign wealth funds to manage resource revenues effectively, promoting industrial diversification, and investing in education and training for their workforce. By allocating resource wealth towards developing other sectors, these states can foster sustainable economic growth and resilience against market fluctuations. Additionally, implementing policies that encourage innovation and support small-to-medium enterprises can create a more balanced economy, reducing reliance on a single resource sector.

Related terms

Resource Curse: The paradox where countries rich in natural resources tend to have less economic growth and worse development outcomes than countries with fewer natural resources.

Currency Appreciation: An increase in the value of a country's currency relative to others, making its exports more expensive and imports cheaper.

Sectoral Shift: A change in the focus of a country's economy from one sector to another, often influenced by shifts in resource availability or demand.