07 Dec What Is the Dutch Disease? Origin of Term and Examples
Moreover, Mironov and Petronevich (2015) dutch disease find that the long-term correlation is even stronger between the RER and oil revenues (oil price multiplied by oil exports) than between the RER and oil prices. This could indicate that, while the use of resource prices is justified by its apparent exogeneity (the argument used by a vast majority of the empirical papers), resource revenue could yield better results for detecting DD. Since the beginning of the 2000s, a large empirical literature has investigated DD, and generated inconclusive results. Arguably, one reason is that DD, or the predictions of DD models, is conditioned by several simplifying assumptions that do not hold in the real world. Put differently, real conditions across countries are too heterogeneous to allow a homogenous DD symptom to emerge.
4 D.4: Economic Growth
- This can lead to the appreciation of the country’s currency, making other exports less competitive and causing a decline in the manufacturing sector.
- These findings demonstrate a deceleration of growth in resource-rich countries and an acceleration of growth in resource-poor countries.
- In this case, an increase in E prices encourages consumers to shift from E to N and T, reinforcing the RER appreciation.
- The uneven distribution of resource wealth can cause disparities in income and living standards among individuals in a country.
Additionally, I include per capita GDP, investment ratio, human capital index, openness index, government spending, and institution index as control variables. The impact of natural resources on the real exchange rate may highlight the international transfer problem. First, empirical evidence indicates a positive long-run net foreign asset position (% of GDP) in most natural resource-rich countries see Lane and Milesi-Ferretti (2007). Consistent with this evidence, I estimate the effect of the resource dependence index on net foreign assets. The results, as reported in Table 7, suggest that a natural resource boom leads to the accumulation of net foreign assets. If the exchange rate is fixed, the conversion of the foreign currency into local currency would increase the country’s money supply, and pressure from domestic demand would push up domestic prices.
The labor share in the service sector increases to a greater extent than the given steady-state level. In the long-run process, the LBD effect serves as the primary driving force behind productivity growth in domestic sectors. Given the stability conditions of the dynamic system, the larger share of labor in the service sector compared to its steady-state level leads to a positive growth rate of the relative productivity ratio.
Encourage Export Diversification
Lucas (1988) introduced a model where both sectors generate learning, but with no spillover between them. While Sachs and Warner (1995) and Gylfason et al. (1999) assumed that learning generated by labor employment in the traded sector spills over perfectly to the non-traded sector. These models demonstrate that the learning process drives endogenous growth in both sectors. A natural resource boom reduces labor’s share in the traded sector, hampers learning by doing (LBD), and potentially retards economic growth. Theoretical and empirical studies reveal the role of fiscal and monetary policies to avoid, or at least mitigate, DD, but conclusions on what these policies should be remain mixed. Similarly, it is unclear whether fixed or flexible nominal exchange rates should be preferred to avoid real exchange rate appreciation.
- The Appendix presents several robustness checks, providing additional insights into my baseline results.
- The Netherlands faced negative economic consequences in the form of currency appreciation, less competitive manufactured products, high unemployment, and a decline in other sectors of industry due to the Dutch disease.
- This has led to new entries of small and developing countries into the group of resource-rich economies (see Fig. 1), making the need to understand the impact of natural resources even more acute.
- Conversely, a resource boom triggers the expansion of the manufacturing sector while simultaneously reducing the service sector in resource-poor countries.
For instance, in Ghana, the Ghana Stabilization Fund (aimed at smoothing oil revenue over time), the Heritage Fund (to save revenue for future generations,) and the Ghana Infrastructure Investment Fund (to finance infrastructure projects) coexist. Regarding SWFs’ performance, Raymond et al. (2017) investigate their impact on exchange rate misalignments in 24 oil- and gas-exporting countries and conclude that having a SWF reduces the volatility of RER misalignments. Instead of creating a SWF, resource revenues can also be simply accumulated by the central bank. Due to high fixed costs, a SWF should be preferred only when expected future resource revenues are large enough (AfDB/BMGF, 2015). Among the very few works on the impact of DD on agriculture that use panel data, Apergis et al. (2014) study a sample of oil-dependent Middle East and North African countries for 1970–2011. Using a dynamic Error Correction Model (ECM), they observe negative correlation between oil rent and agricultural value-added in the long term.
Export Citation
The appreciation of the currency due to resource exports can make non-resource sectors less competitive. The limited diversification of a country’s economy reduces its ability to develop a powerful industrial base. Countries heavily dependent on resource exports are more vulnerable to price fluctuations in global markets. A decline in resource prices can have a significant impact on country’s revenue and overall economic stability.
IMF Publications Newsletter
As a result, a resource boom accelerates productivity growth in the manufacturing sector and decelerates it in the service sector, leading to an increase in the relative sectoral output and an acceleration in economic growth. The Dutch disease literature reveals several gaps between empirical evidence and theoretical predictions. To bridge such gaps, I develop a model that accounts for uneven spillovers of technological progress from the resource sector to other domestic sectors.
Other causes and effects of the resource curse
In conclusion, Dutch disease occurs when a sudden increase in the revenue from resource exports, such as oil or gas, leads to the appreciation of the real exchange rate, making other industries less competitive. Government policies such as institutional reforms, skills development, and education can overcome the negative impact of the Dutch disease. Other research suggests that distributing the resource revenues directly to people can help these countries get out of such a low-level political-economy condition and address a host of problems, including inefficiencies in labor markets and the public sector. The same political economy factors, however, also make the application of this idea difficult.
Additionally, the results can be compared with those of Lartey et al. (2012), who studied the effect of remittance flows on sectoral growth. While their findings for the manufacturing sector are qualitatively similar to my estimated results, they differ for the service sector. This finding also appears to align with the decrease in the level of relative sectoral output discussed in the previous subsection. The coefficient values indicate that the contraction in the service sector is less pronounced than in the manufacturing sector, which likely contributes to a reduction in the level of relative sectoral output.
The elites in these countries often cling to their monopoly power over the control of natural resources. Public service jobs, subsidies, and other forms of transfers are typically geared to ensure political clout and survival. Therefore, in most cases, not only a sound macroeconomic framework, but also a deep transformation of the state-society relationship is paramount to curing the disease. Transferring at least a share of the revenues directly to people would be a good start. This empirical literature review has confirmed that the seminal theoretical models of DD can help to understand the economic processes that happened in developing resource-rich countries.
Another panel data analysis by Abdlaziz et al. (2018) estimates the impact of oil prices on 25 developing net oil-exporting countries on agricultural value-added from 1975 to 2014. Using Fully Modified OLS, Dynamic OLS, and Pooled Mean-Group estimators, they conclude that there was a negative effect of oil prices on the agricultural sector. That said, the commodity prices dropped significantly three years later, and economic growth stagnated.
IMF reports and publications by country
However, the question remains whether appropriate public policy and efficient management of natural resource revenues might help mitigating DD. We describe in this section the lessons that can be drawn from the theoretical and empirical literature relative to the role of macroeconomic policies. Despite the importance accorded to Corden and Neary (1982)’s article, a large literature emerged at the beginning of the 1980s to explain various impacts of DD. The seminal model of Corden and Neary only highlights the real aspects (not the monetary ones) and focuses on the domestic economy (ignoring external competitiveness and the exchange rate of the domestic currency against foreign currencies). In addition, it was developed for industrialized countries and some of its assumptions are unlikely to be met in developing countries.