Dutch disease

In economics, Dutch disease is the apparent causal relationship between the increase in the economic development of a specific sector (for example natural resources) and a decline in other sectors (like the manufacturing sector or agriculture).

The term was coined in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of the large Groningen natural gas field in 1959.^[1]

The presumed mechanism is that while revenues increase in a growing sector (or inflows of foreign aid), the given economy's currency becomes stronger (appreciates) compared to foreign currencies (manifested in the exchange rate). This results in the country's other exports becoming more expensive for other countries to buy, while imports become cheaper, altogether rendering those sectors less competitive.

While it most often refers to natural resource discovery, it can also refer to "any development that results in a large inflow of foreign currency, including a sharp surge in natural resource prices, foreign assistance, and foreign direct investment".^[2]

^ "The Dutch Disease" (PDF). The Economist. 26 November 1977. pp. 82–83.
^ Ebrahim-zadeh, Christine (March 2003). "Back to Basics – Dutch Disease: Too much wealth managed unwisely". Finance and Development, A quarterly magazine of the IMF. IMF. Archived from the original on 4 July 2008. Retrieved 17 June 2008. This syndrome has come to be known as "Dutch disease". Although the disease is generally associated with a natural resource discovery, it can occur from any development that results in a large inflow of foreign currency, including a sharp surge in natural resource prices, foreign assistance, and foreign direct investment. Economists have used the Dutch disease model to examine such episodes, including the impact of the flow of American treasures into sixteenth-century Spain and gold discoveries in Australia in the 1850s.

[1] "The Dutch Disease" (PDF). The Economist. 26 November 1977. pp. 82–83.

[2] Ebrahim-zadeh, Christine (March 2003). "Back to Basics – Dutch Disease: Too much wealth managed unwisely". Finance and Development, A quarterly magazine of the IMF. IMF. Archived from the original on 4 July 2008. Retrieved 17 June 2008. This syndrome has come to be known as "Dutch disease". Although the disease is generally associated with a natural resource discovery, it can occur from any development that results in a large inflow of foreign currency, including a sharp surge in natural resource prices, foreign assistance, and foreign direct investment. Economists have used the Dutch disease model to examine such episodes, including the impact of the flow of American treasures into sixteenth-century Spain and gold discoveries in Australia in the 1850s.

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