Dutch Disease

Definition

Dutch Disease is an economic term that refers to the negative consequences of a sudden increase in a country's currency value. It is mainly associated with the discovery or development of valuable natural resources and the unexpected impact of such discoveries on a country's overall economy.

Origin

The concept of Dutch Disease originated in the 1960s in the Netherlands. At that time, the discovery of large natural gas reserves led to the appreciation of the Dutch guilder. However, this economic boom resulted in a decline in manufacturing as exports became more expensive, leading to an imbalanced economic structure.

Categories and Features

Dutch Disease is typically categorized into resource-based and non-resource-based types. Resource-based Dutch Disease is triggered by the discovery or price increase of natural resources, while non-resource-based can be caused by other factors such as foreign aid or capital inflows. Its features include currency appreciation, manufacturing sector decline, and an economy overly reliant on the resource sector.

Case Studies

A classic example is the discovery of the North Sea oil fields in the UK during the 1970s, which led to the appreciation of the British pound and a decrease in manufacturing competitiveness. Another example is Nigeria, where the oil export boom led to the neglect of agriculture and manufacturing, making the economy overly dependent on oil.

Common Issues

Investors might misunderstand Dutch Disease as a short-term phenomenon, but it can lead to long-term structural economic problems. Additionally, over-reliance on a single resource can increase economic vulnerability.