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Encyclopedia > Dutch disease

Dutch disease is an economic concept that tries to explain the apparent relationship between the exploitation of natural resources and a decline in the manufacturing sector combined with moral fallout. The theory is that an increase in revenues from natural resources will deindustrialise a nation’s economy by raising the exchange rate, which makes the manufacturing sector less competitive and public services entangled with business interests. However, it is extremely difficult to definitively say that Dutch disease is the cause of the decreasing manufacturing sector, since there are many other factors at play in the very complex global economy. While it most often refers to natural resource discovery, it can also refer to “any development that results in a large inflow of foreign currency, including a sharp surge in natural resource prices, foreign assistance, and foreign direct investment and open speculation based on greed-technology.” [1] Branch death, or Flagging, at multiple locations in the crown of a diseased elm. ... Face-to-face trading interactions on the New York Stock Exchange trading floor. ... Natural resources are commodities that are considered valuable in their relatively unmodified (natural) form. ... Competition characterises a biochemical, ecologic, economic, political, or sporting activity whereby two or more individuals or groups strive antagonistically against one another for some reward. ...


The term was coined in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of natural gas in the 1960s, culminating in the world's biggest Public-Private Partnership (P3) N.V. Nederlandse Gasunie between Esso -now ExxonMobil, Shell and the Dutch government in 1963: controversial because of unequality of partners and a forced international contract due to post-war American technology advantage of long-distance and high-pressure natural gas distribution eventually needed for the European network: La condition Americaine.[1] [2] The Economist is an English-language weekly news and international affairs publication owned by The Economist Newspaper Ltd and edited in London. ... Motto: Je Maintiendrai (Dutch: Ik zal handhaven, English: I Shall Uphold) Anthem: Wilhelmus van Nassouwe Capital Amsterdam1 Largest city Amsterdam Official language(s) Dutch2 Government Parliamentary democracy Constitutional monarchy  - Queen Beatrix  - Prime minister Jan Peter Balkenende Independence Eighty Years War   - Declared July 26, 1581   - Recognised January 30, 1648 (by Spain... For other uses, see Natural gas (disambiguation). ... Public-private partnership (PPP) is a system in which a government service or private business venture is funded and operated through a partnership of government and one or more private sector companies. ... Alfa Romeo P3 1930s Grand Prix racing car DR P3 (radio station) DR P3* Period 3 of the periodic table Intel 80386 3rd generation processor architecture P3 biological confinement level P3 club owned by Piper Halliwell on the television series Charmed P3 Fulfillment, provider of fulfillment services P3, one of... N.V. Nederlandse Gasunie (short form: Gasunie) is a Dutch natural gas infrastructure and transportation company. ... This article is about the trade name. ... For other uses, see Exon (disambiguation). ... Look up shell in Wiktionary, the free dictionary. ... The Politics of the Netherlands take place within the framework of a parliamentary representative democracy and a constitutional monarchy. ... A contract is a legally binding exchange of promises or agreement between parties that the law will enforce. ... By the mid 20th century humans had achieved a mastery of technology sufficient to leave the surface of the Earth for the first time and explore space. ... Long distance in telecommunications, refers to telephone calls made outside a certain area, usually characterized by an area code outside of a local call area. ... High pressure science and engineering is studying the effects of high pressure on materials and the design and construction of devices, such as a diamond anvil cell, which can create high pressure. ... For other uses, see Natural gas (disambiguation). ...

Contents

The “Core Model”

The classic economic model describing Dutch Disease was developed by the economists W. Max Corden and J. Peter Neary in 1982. In the model, there is the non-traded good sector (this includes services) and two traded good sectors: the booming sector, and the lagging sector, also called the non-booming tradable sector. The booming sector is usually the extraction of oil or natural gas, but can also be the mining of gold, copper, diamonds or bauxite, or the production of crops, such as coffee or cocoa. The lagging sector generally refers to manufacturing, but can also refer to agriculture. Warner Max Corden (b. ... Year 1982 (MCMLXXXII) was a common year starting on Friday (link displays the 1982 Gregorian calendar). ... This article is about a term used in economics. ... This page is a candidate to be moved to Wiktionary. ... Manufacturing (from Latin manu factura, making by hand) is the use of tools and labor to make things for use or sale. ...


A resource boom will affect this economy in two ways. In the resource movement effect, the resource boom will increase the demand for labor, which will cause production to shift toward the booming sector, away from the lagging sector. This shift in labor from the lagging sector to the booming sector is called direct-deindustrialisation. However, this effect can be negligible, since the hydrocarbon and mineral sectors generally employ few people.[3] The spending effect occurs as a result of the extra revenue brought in by the resource boom. It increases the demand for labor in the non-tradable, shifting labor away from the lagging sector. This shift from the lagging sector to the non-tradable sector is called indirect-deindustrialisation[citation needed]. As a result of the increased demand for non-traded goods, the price of these goods will increase. However, prices in the traded good sector are set internationally, so they cannot change. This is an increase of the real exchange rate.[4] In economics, the term boom and bust refers to the movement of an economy through economic cycles due to changes in aggregate demand. ... Look up Hydrocarbon in Wiktionary, the free dictionary. ... For other uses, see Mineral (disambiguation). ... In finance, the exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other. ...


Effects of Dutch Disease

In simple trade models, a country ought to specialise in industries that it has a comparative advantage in, so theoretically, a country rich in natural resources would be better off specializing in the extraction of natural resources. In reality, however, the shift away from manufacturing can be detrimental. In economics, David Ricardo is credited for the principle of comparative advantage to explain how it can be beneficial for two parties (countries, regions, individuals and so on) to trade if one has a lower relative cost of producing some good. ...


If the natural resources begin to run out or if there is a downturn in prices, competitive manufacturing industries do not return as quickly or as easily as they left. This is because technological growth is smaller in the booming sector and the non-tradable sector than the non-booming tradable sector.[5] Since there has been less technological growth in the economy relative to other countries, its comparative advantage in non-booming tradable goods will have shrunk, thus leading firms not to invest in the tradables sector.[6] Also, volatility in the price of natural resources, and thus the real exchange rate may prevent more investment from firms, since firms will not invest if they are not sure what the future economic conditions will be.[7]


There are also many other harmful effects often associated with Dutch disease, such as corruption and protectionist policies for affected lagging sector industries. However, these effects can most accurately be described as part of the broader resource curse. The resource curse or paradox of plenty, refers to the paradox that countries with an abundance of natural resources tend to have less economic growth than countries without these natural resources. ...


Minimising Dutch Disease

There are two basic ways to reduce the threat of Dutch disease: by slowing the appreciation of the real exchange rate and by boosting the competitiveness of the manufacturing sector.


One approach is to sterilise the boom revenues, that is, not to bring all the revenues in to the country all at once, and to save some of the revenues abroad in special funds and bring them in slowly. Sterilisation will reduce the spending effect. Another benefit of letting the revenues into the country slowly, is that it can give a country a stable revenue stream, rather than not knowing how much revenues it will have from year to year. Also, by saving the boom revenues, a country is saving some of the revenues for future generations. Especially in developing countries, this can be politically difficult as there is often pressure to spend the boom revenues immediately to alleviate poverty, but this ignores broader macroeconomic implications. Examples of these sovereign wealth funds include the Government Pension Fund in Norway, the Stabilization Fund of the Russian Federation or the State Oil Fund of Azerbaijan or the Future Generations Fund of the State of Kuwait established in 1976. Another strategy for avoiding real exchange rate appreciation is to increase saving in the economy in order to reduce large capital inflows which are able to cause an appreciation of the real exchange rate. This can be done if the country runs a budget surplus. A country can encourage individuals and firms to save more by reducing income and profit taxes. By increasing saving, a country can reduce the need for loans to finance government deficits and foreign direct investment. Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Gold standard Fiscal policy Spending   Deficit   Debt Policy-mix Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Regulation Banking Fractional-reserve Full-reserve   Free banking Islamic... The Petroleum Fund of Norway is a government controlled fund owned by the state of Norway. ... The Stabilization fund of the Russian Federation (Russian: ) was established by resolution of the Government of Russia on January 1, 2004, as a part of the federal budget to balance the federal budget at the time of when oil price falls below a cut-off price, currently set at $27... In common usage, saving generally means putting money aside, for example, by putting money in the bank or investing in a pension plan. ... Capital has a number of related meanings in economics, finance and accounting. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        An income tax is a tax levied on the financial income... “Taxes” redirects here. ... This article is about economics. ...


Investing in education and infrastructure are able to increase the competitiveness of the manufacturing sector. An alternative is that a government can resort to protectionism, that is, increase subsidies or tariffs. However, this could be a dangerous strategy and could worsen the effects of Dutch Disease, as large inflows of foreign capital are usually provided by the export sector and bought up by the import sector. Imposing tariffs on imported goods will artificially reduce that sector’s demand for foreign currency, leading to further appreciation of the real exchange rate.[8] Protectionism is the economic policy of restraining trade between nations, through methods such as high tariffs on imported goods, restrictive quotas, a variety of restrictive government regulations designed to discourage imports, and anti-dumping laws in an attempt to protect domestic industries in a particular nation from foreign take-over... In economics, a subsidy is generally a monetary grant given by a government to lower the price faced by producers or consumers of a good, generally because it is considered to be in the public interest. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        For other uses of this word, see tariff (disambiguation). ...


Diagnosing Dutch Disease

It is rather difficult to definitively say that a country has Dutch Disease because it is difficult to prove the relationship between an increase in natural resource revenues, the real-exchange rate and a decline in the lagging sector. There are a number of different things that could be causing this appreciation of the real exchange rate. The Balassa-Samuelson effect occurs when productivity increases affect the real exchange rate. Also important are changes in the terms of trade and large capital inflows.[9] Often these capital inflows are caused by foreign direct investment or to finance a country’s debt. The Balassa-Samuelson effect is either of two related things: The observation that consumer price levels in wealthier countries are systematically higher than in poorer ones (the Penn effect). An economic model predicting the above, based on the assumption that productivity or productivity growth-rates vary more by country in...


Similarly, it is difficult to show what is causing a decrease in the lagging sector. A case in point is the Netherlands. Though this effect is named after the Netherlands, economists have argued that the decline in the Dutch manufacturing industry was actually caused by unsustainable spending on social services.[10]


Possible examples

  • Australia - Australian gold rush in the 19th century, first documented by Cairns in 1859[10]
  • Australia - mineral commodities in the 2000s[11]
  • Azerbaijan - oil in the 2000s[12]
  • Canada - oil in the 2000s, and oil sands in the province of Alberta and Saskatchewan
  • Chile - copper in the 2000s
  • Mexico - oil boom in 1970s and early 1980s
  • Ireland - property boom in the 2000s[13]
  • Netherlands - in the 1960s[10]
  • Nigeria and other post-colonial African states in the 1990s [14]
  • Norway - oil boom from the late 1970s until the early 1990s
  • Philippines - Strong forex inflows in the 2000s leading to appreciation of currency and loss of competitiveness[15]
  • Russia - oil and natural gas in the 2000s[16]
  • Spain - large inflow of gold and other wealth during 16th century Habsburg Spain from the Americas[10]
  • United Kingdom - financial services boom in the 1990s and 2000s, while other industries have largely disappeared [17] [18]
  • United States - The American South of the early 19th Century experienced retarded industrialization because of cotton's dominance as an export good. Cotton price increases in the 1850s actually caused slave and free working populations to redistribute from cities and industrial trades to cotton-growing regions.

The Australian gold rushes started in 1851 when prospector Edward Hargraves discovered gold near Bathurst, New South Wales, at a site Hargraves called Ophir. ... The property market in the Republic of Ireland in 2007 is controversially described by some as the Irish Property Bubble. ... Forex can relate to: Foreign Exchange - an abbreviation for Foreign Exchange, often used in relation to currency exchange markets. ... During the reign of Emperor Charles V (Carlos I of Spain), who ascended the thrones of the kingdoms of Spain after the death of his grandfather Ferdinand, Habsburg Spain controlled territory ranging from Philippines to the Netherlands, and was, for a time, Europes greatest power. ...

Notes

  1. ^ “Back to Basics. Dutch Disease: Too much wealth managed unwisely” (March 2003, Volume 40, Number 1). “Finance & Development. A quarterly magazine of the IMF”. http://www.imf.org/external/pubs/ft/fandd/2003/03/ebra.htm
  2. ^ “The Dutch Disease” (November 26, 1977). The Economist, pp. 82-83.
  3. ^ Corden, W.M. (1984). “Boom Sector and Dutch Disease Economics: Survey and Consolidation.” Oxford Economic Papers 36: 362.
  4. ^ Corden W.M., Neary J.P. (1982). “Booming Sector and De-industrialisation in a Small Open Economy.” The Economic Journal 92 (December): 825-848.
  5. ^ Van Wijnbergen, Sweder (1984). “The ‘Dutch Disease’: A Disease After All?” The Economic Journal 94 373:41.
  6. ^ Krugman, Paul (1987). “The Narrow Moving Band, the Dutch Disease, and the Competitive Consequences of Mrs. Thatcher.” Journal of Development Economics 27 1-2:50.
  7. ^ Gylfason, T., Herbertsson, T.T., Zoega, G. (1999). A mixed blessing. Macroeconomics Dynamics. 3 June:212.
  8. ^ Collier, Paul (2007). “The Bottom Billion.” Oxford University Press, pp. 162
  9. ^ De Gregario, José, Wolf, Wolger C. (1994). Terms of trade, productivity, and the real exchange rate. NBER Working Paper 4807. Cambridge, MA.
  10. ^ a b c d Corden (1984), 359
  11. ^ “Mining boom could bust us”. Paul Cleary, The Age http://www.theage.com.au/news/business/mining-boom-could-bust-us/2007/11/10/1194329562546.html
  12. ^ “Boom and gloom” The Economist Mar 8th 2007 http://www.economist.com/displayStory.cfm?story_id=8819945&fsrc=RSS
  13. ^ “The Irish Economy and the Inconvenient Truth” http://www.finfacts.com/irelandbusinessnews/publish/article_10009014.shtml
  14. ^ “Our Continent, Our Future”. Mkandawire, T. and C. Soludo. http://www.idrc.ca/en/ev-9389-201-1-DO_TOPIC.html “In most recent attempts to explain Africa’s performance with growth and investment regressions, studies find that inaccessible location, poor port facilities, and the ‘Dutch Disease’ syndrome, caused by large natural-resource endowments, constitute serious impediments to investment and growth”.
  15. ^ “Strong forex inflows now hurting economy - BSP”. GMANews.TV. http://www.gmanews.tv/story/69158/Strong-forex-inflows-now-hurting-economy---BSP
  16. ^ Latsis, O. (2005). “Dutch Disease Hits Russia,” Moscow News, June 8-14. http://eng.globalaffairs.ru/engsmi/922.html
  17. ^ The UK economy is vulnerable http://www.ft.com/cms/s/0/1a142a1c-a689-11dc-b1f5-0000779fd2ac.html?nclick_check=1
  18. ^ The FT worries about the Anglo Disease. J. Guillet. http://www.eurotrib.com/story/2007/12/10/74217/683

See also

The resource curse or paradox of plenty, refers to the paradox that countries with an abundance of natural resources tend to have less economic growth than countries without these natural resources. ...

External links

  • Norway’s Government Pension Fund
  • State Oil Fund of the Azerbaijan Republic

  Results from FactBites:
 
Dutch disease - Wikipedia, the free encyclopedia (1250 words)
Dutch disease is an economic concept that tries to explain the seeming relationship between the exploitation of natural resources and a decline in the manufacturing sector.
The classic economic model describing Dutch Disease was developed by the economists W. Max Corden and J. Peter Neary in 1982.
It it rather difficult to definitively say that a country has Dutch Disease because it is difficult to prove the relationship between an increase in natural resource revenues, the real-exchange rate and a decline in the lagging sector.
Dutch elm disease - Wikipedia, the free encyclopedia (1799 words)
Dutch elm disease is a fungal disease of elm trees which is spread by the elm bark beetle.
The disease was first reported in the United States in 1928, with the beetles believed to have arrived in a shipment of logs from the Netherlands destined for the Ohio furniture industry.
The disease spread slowly from New England westward and southward, almost completely destroying the famous Elms in the 'Elm City' of New Haven, reaching the Chicago area by 1960 and Minneapolis by 1970.
  More results at FactBites »

 
 

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