Definition
Dutch Disease is an economic term that refers to the negative consequences arising from large increases in a country’s income. It primarily refers to the apparent causal relationship between the increase in exploitation of natural resources and a decline in the manufacturing sector. The name Dutch disease comes from a crisis in the Netherlands in the 1960s due to the discovery of vast natural gas deposits in the North Sea.
Phonetic
The phonetic transcription of “Dutch Disease” is: /ˈdʌtʃ dɪˈziːz/
Key Takeaways
<ol><li>Dutch Disease refers to the negative economic impact that can occur when a substantial increase in revenue from natural resources leads to a decline in other sectors of the economy. The name was coined after the Netherlands experienced a decline in its manufacturing sector following large-scale natural gas discoveries in the North Sea.</li><li>The disease manifests in two main ways. First, an increase in wealth from natural resource extraction leads to an appreciation of the local currency, making exports more expensive and less competitive. This can lead to a decline in manufacturing and potential long-term deindustrialization. Second, the newfound wealth can lead to increased domestic consumption and higher prices, leading to inflation, which is another factor causing non-resource sectors to become less competitive.</li><li>Mitigation strategies for Dutch Disease include investing the revenue from natural resources into a sovereign wealth fund, as Norway has done. This can help to stabilize the economy and protect other sectors. Also, governments can also attempt to diversify their economies, investing in education and infrastructure that can support other types of industries. This approach can help to create more balanced economic development.</li></ol>
Importance
The term “Dutch Disease” is important in business and finance as it refers to the adverse effects that can occur when a country’s economy becomes heavily focused on one particular resource or industry, often a profitable export such as oil or gas. Named after the economic downturn experienced in the Netherlands in the 1960s after discovery of a large natural gas field, Dutch Disease is a key concept in understanding the potential downfall of relying heavily on a single sector. This can lead to decline in other vital sectors, increase unemployment rate, and make the economy vulnerable to price fluctuations in the international market. Hence, it’s crucial to maintain a diversified economy to avoid Dutch Disease.
Explanation
The term “Dutch Disease” is utilized to describe the economic situation where a country heavily relies on its large, thriving sector (often, but not necessarily, a natural resource like oil or gas) that it leads to the neglect or decline of other sectors due to the national currency’s increase in value. This term originated from the Netherlands’ experience in the 1960s, after they discovered a large natural gas deposit in the North Sea. Initially, this discovery should’ve propelled their economy, but instead, the Dutch economy suffered because other sectors like manufacturing started to decline.This concept is critical in understanding an economic paradox where a seemingly beneficial event, like the discovery of natural resources, can unexpectedly result in more harm than good for the country’s overall economy. It is a cautionary tale that emphasizes the importance of having a diverse and balanced economy, and not becoming too dependent on one prosperous sector. Economists and policymakers often use the Dutch Disease as a case study to craft economic strategies that help avoid such a scenario, by encouraging investments in various sectors and promoting economic diversification.
Examples
1. The Netherlands: The term “Dutch Disease” originates from The Netherlands’ experience in the 1960s, following the discovery of a large natural gas field. As revenue from natural gas exports surged, the Dutch guilder appreciated, making manufacturing exports less competitive and leading to a decline in the manufacturing sector. As a result, unemployment increased and the economy stagnated despite the increased wealth from natural gas.2. Australia: Australia experienced a version of the Dutch disease during the mining boom in the 2000s. As global demand for commodities like coal and iron skyrocketed, Australia’s mining sector grew rapidly. The Australian dollar appreciated, harming non-mining sectors like manufacturing and tourism. Later, when commodity prices fell, Australia faced significant economic challenges.3. Nigeria: Nigeria’s economy heavily relies on oil exports, representing the majority of its export revenues. The boom in the oil industry led to an influx of foreign revenue, causing the local currency, the naira, to strengthen. This led to a decline in competitiveness of other sectors, particularly agriculture and manufacturing, leading to a contraction of these areas and hence a prevalence of Dutch Disease.
Frequently Asked Questions(FAQ)
What is Dutch Disease?
Dutch Disease is an economic term that refers to the negative consequences that can arise from a significant increase in a country’s income from natural resources. It is named after the Netherlands because the phenomenon was first observed when vast quantities of natural gas were discovered in the North Sea in the 1960s.
What causes Dutch Disease?
Dutch Disease typically occurs when a country discovers large reserves of a natural resource or experiences a sudden boom in the commodity prices. This leads to a heavy reliance on the commodity sector, causing the country’s currency to appreciate, which in turn makes its manufacturing sector less competitive.
What are the consequences of Dutch Disease?
The consequences of Dutch Disease include a decline in the manufacturing sector, loss of jobs in other non-resource sectors, and increased dependency on international commodity prices. This can lead to a lack of economic diversity, making the nation vulnerable to commodity price fluctuations.
How can a country avoid Dutch Disease?
To avoid Dutch Disease, a country can reinvest resource revenue into other sectors of the economy to promote diversification. Also, implementing policies to avoid rapid currency appreciation, fostering manufacturing and service sectors, and establishing a sovereign wealth fund can help.
Can Dutch Disease be reversed?
Yes. A country can reverse Dutch Disease by diversifying its economy, investing revenue in other sectors, improving education and infrastructure, and implementing policies to support non-resource-based industries.
Have there been actual cases of Dutch Disease in recent history?
Yes. Some examples include Australia during its mining boom, Canada in the early 2000s due to its petroleum industry, and Nigeria due to its dependence on oil exports.
Can Dutch Disease impact developing countries?
Yes, Dutch Disease can significantly impact developing countries. In many cases, a significant increase in income from natural resources reinforces the dependency on such resources, and leaves the country vulnerable to price volatility.
Is Dutch Disease only related to natural resources?
No, Dutch Disease can also occur with any event that significantly increases inflows of foreign currency, such as a sharp increase in foreign direct investment, large remittances, or a surge in export prices.
Related Finance Terms
- Resource Curse: Also known as the paradox of plenty, refers to the paradox that countries and regions with an abundance of natural resources, specifically point-source non-renewable resources like minerals and fuels, tend to have less economic growth and worse development outcomes than countries with fewer natural resources.
- Two-speed economy: An economic phenomenon in which sectors of an economy move at different speeds or levels of growth.
- Exchange Rate: The value of one country’s currency versus the that of another.
- Non-Tradable Sector: A sector, due to the nature of the produced goods or services, that doesn’t compete with industries abroad.
- Deindustrialization: The process of social and economic change caused by the reduction or complete elimination of industrial capacity in a country or region due to technological change, globalization, economic policies, or environmental regulations.
