Dutch Disease

Discussion in 'Forex - Currencies Forums' started by Daniela-TFC, Jan 30, 2015.

  1. Daniela-TFC

    Daniela-TFC Active Member

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    Dutch disease is the negative impact on an economy of anything that gives rise to a sharp inflow of foreign currency or a large increase in a country’s income, such as the discovery of large oil reserves. This can result also from any large increase in foreign currency, including foreign direct investment, foreign aid or a substantial increase in natural resource prices.

    Foreign money inflows lead to currency appreciation, affecting the country’s other export products to be less price competitive abroad. If prolonged, it can also lead to a high level of cheap imports which can lead to deindustrialization of the uncompetitive sectors. Industries apart from resource exploitation are just abandoned and moved to other countries. This also means that manufacturing jobs are moved also to other countries.

    “Dutch disease” originates from a crisis in the Netherlands in the 1960s that was the result of natural gas deposits discoveries in the North Sea. The newfound long-term income caused the Dutch guilder to rise, affecting exports of all non-oil products to be less competitive on the world market.

    In 1970s, this economic condition occurred in Great Britain. The price of oil quadrupled and it became economically viable to drill for North Sea Oil off the coast of Scotland. By the late 1970s, Britain had become a net exporter of oil; it had previously been a net importer. The pound soared in value, but the country fell into recession when British workers demanded higher wages and net exports became uncompetitive.

    Notable other instances of Dutch Disease have been in Canada and many African countries where resources have seriously hampered growth and left the manufacturing sector of the economy weak. Canada has been the main example of this. In the 2000s the appreciation of Canada’s dollar as a result of the high global demand for its natural resources, the most important being its Athabasca oil sands, has left its manufacturing sector weak and uncompetitive.

    The main ways of preventing Dutch Disease is by trying to slow the appreciation of the exchange rate and by focusing on increasing the competitiveness of the manufacturing sector. The former can be achieved by diverting revenues produced by the natural resources overseas or into investment elsewhere, so that the economy does not receive them all at once.

    We could argue that countries mainly exporting oil could not be affected by dutch disease. I mean the arab countries – they don’t have other big sectors which make up big exports. They import most of the other products they need including durable goods and food. The conclusion is that we should look out for such condition and prepare our economic expectations for the longer term to aggravate from initial good positive short and medium term economic effects.
     

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