Dutch Disease

Published Apr 8, 2023

Definition of Dutch Disease

Dutch Disease refers to the economic phenomenon where a significant increase in income from natural resources exports leads to a decline in the manufacturing and agricultural sectors of a country. The term was coined in reference to the Netherlands, which experienced a decline in its manufacturing industry after the discovery of a large natural gas field in the 1960s. The decline in the manufacturing sector is attributed to the appreciation of the country’s currency, which makes its manufactured goods less competitive in the global market.

Example

A good example of Dutch disease can be found in Nigeria in the 1970s. The country experienced a significant increase in income from oil exports, which led to the appreciation of its currency. As a result, the manufacturing and agricultural sectors suffered, and the economy became overly dependent on oil. The appreciation of the currency made imported goods cheaper, leading to a decline in domestic manufacturers’ competitiveness in the global market. This dependency on oil exports also resulted in a vulnerability to external shocks, such as fluctuations in oil prices.

Why Dutch Disease Matters

Dutch Disease is a phenomenon that can be damaging to the long-term economic growth of a country. Overreliance on natural resources exports not only leads to a decline in other sectors of the economy but also exposes the country to external shocks.

To avoid Dutch Disease, countries are advised to diversify their economies by developing other sectors, such as manufacturing and agriculture. Diversification would reduce exposure to external shocks and make the economy more resilient. It is also essential that the government manages the revenue from natural resources exports prudently by investing in other productive sectors and saving for the future.