Rich in Resources: Norway, Australia, Canada and More
Dutch Disease
How a resource boom can harm a country's manufacturing and other exports through a stronger currency and higher costs, and how countries try to prevent it.
In the 1960s, the Netherlands discovered large natural gas reserves. Gas exports soared, but Dutch manufacturing struggled. In 1977, The Economist magazine called this the “Dutch disease”.
How it works
- A resource boom brings in large export earnings.
- The currency strengthens as foreigners buy the country’s currency.
- Other exports, such as manufactured goods, become more expensive abroad and less competitive.
- Workers and capital move into the resource sector and related services, raising wages and costs for other industries.
- Manufacturing declines.
When the resource boom ends, the country may be left with a weakened manufacturing base.
Examples
- The Netherlands after gas discoveries.
- Australia during its mining boom.
- Many oil exporters.
Why it matters
Manufacturing often brings productivity growth, skills and diversification. Losing it can make an economy dependent on volatile commodities.
Prevention
- Saving resource revenue abroad in sovereign wealth funds, as Norway does, reduces currency pressure.
- Fiscal rules limiting spending of windfalls.
- Investing in education and infrastructure that help other sectors.
Beyond resources
Similar effects can come from large aid inflows or remittances, which can also push up the currency.
After a gas boom, a country's currency rises 30 percent. A furniture exporter's products become 30 percent more expensive for foreign buyers. It loses orders and cuts jobs, even though nothing changed at the factory.
Booms can weaken other industries through currency appreciation and higher costs.
- Dutch disease was named after the Netherlands' gas boom.
- Resource exports strengthen the currency, hurting other exports.
- Manufacturing can decline, leaving the economy less diversified.
- Saving revenue abroad and fiscal rules help prevent it.
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