What Is Dutch Disease?
Dutch disease describes the negative consequences that can arise from a spike in the value of a nation’s currency. It is primarily associated with the new discovery or exploitation of a valuable natural resource and the unexpected repercussions that such a discovery can have on the overall economy of a nation.
Key Takeaways
- Dutch disease describes the paradox wherein seemingly good news, such as the discovery of large oil reserves, can harm a country’s broader economy.
- It often starts with a large influx of foreign cash to exploit a newfound resource.
- Common symptoms include a rising currency value leading to a drop in exports and a loss of jobs to other countries.
Economic Effects of Dutch Disease
Dutch disease exhibits the following prominent economic effects:
- Decreased Export Competitiveness: It diminishes the price competitiveness of the affected country’s manufactured goods in global markets.
- Increase in Imports: The local population may favour imported goods due to a stronger currency.
These factors can contribute to long-term unemployment as manufacturing jobs move to lower-cost countries. Meanwhile, non-resource-based industries suffer due to the increased wealth generated by resource-based industries.
The Origin of Dutch Disease
The term “Dutch disease” was coined by The Economist magazine in 1977, in relation to a crisis in The Netherlands after the discovery of vast natural gas deposits in the North Sea in 1959. The newfound wealth and massive exports of oil led to a sharp rise in the value of the Dutch guilder, making other Dutch exports less competitive on the world market. This resulted in an increase in unemployment from 1.1% to 5.1% and a drop in capital investment in the country.
Since then, Dutch disease has become widely used in economic circles to describe paradoxical situations where favorable developments, such as the discovery of large oil reserves, negatively impact a country’s broader economy.
Notable Examples of Dutch Disease
Great Britain in the 1970s
In the 1970s, Dutch disease heavily affected Great Britain. When oil prices quadrupled, it became economically viable to drill for North Sea Oil off the coast of Scotland. By the late 1970s, Britain had transformed from a net importer to a net exporter of oil. Although the value of the pound surged, the country fell into recession as British workers demanded higher wages and Britain’s other exports became uncompetitive.
Canada and Russia in the 2010s
In 2014, economists in Canada reported that the influx of foreign capital related to the exploitation of the country’s oil sands may have led to an overvalued currency and a decreased competitiveness in the manufacturing sector. Similarly, the Russian ruble appreciated significantly for similar reasons. However, by 2016, when the price of oil dropped markedly, both the Canadian dollar and the ruble returned to lower values, easing the concern of Dutch disease in these countries.
Related Terms: price competitiveness, net exporter, net importer.
References
- International Monetary Fund. “Dutch Disease: Wealth Managed Unwisely”.
- The Economist. “The Dutch Disease”.
- Federal Reserve Bank of St. Louis. “Dutch Disease or Monetarist Medicine?: The British Economy Under Margaret Thatcher”, Pages 27, 35-37.
- KFW Economic Research. “Russia’s ‘Dutch Disease”.’
- University of Calgary. “Going Dutch? The Impact of Falling Oil Prices on the Canadian Economy”, Page 1.
