Dutch Disease

Dutch Disease

Dutch disease describes an economic paradox in which a boom in a country’s natural-resource sector leads to adverse effects on the broader economy—most notably a loss of competitiveness in manufacturing and other tradable sectors.

How it works

Two main channels explain the phenomenon:
– Spending effect: Resource exports bring large foreign currency inflows, raising domestic income and demand for non-tradable goods. This pushes up wages and prices in the domestic economy.
– Resource movement effect: Labor and capital shift toward the booming resource sector and non-tradable services, reducing resources available for manufacturing and other tradable industries.

Combined, these effects often cause:
– Real appreciation of the currency
– Declining exports of manufactured goods
– Rising imports
– Job losses in tradable sectors and potential long-term deindustrialization

Origin of the term

The term originated in a 1977 article in The Economist, describing the Netherlands’ experience after large natural-gas discoveries in the North Sea (1959 onward). The resulting export boom and currency appreciation made other Dutch industries less competitive, contributing to rising unemployment and lower investment outside the resource sector.

Notable examples

• Netherlands (1960s–1970s): North Sea gas exports led to a stronger guilder and weakened non-resource industries.
• United Kingdom (1970s): North Sea oil contributed to a stronger pound and industrial difficulties as other exports became less competitive.
• Canada and Russia (2010s): Resource-driven capital inflows and an appreciation of the Canadian dollar and Russian ruble raised concerns about weaker manufacturing competitiveness; these pressures eased after oil prices fell in 2014–2016.

Why some countries avoid it

Policy choices can blunt or prevent Dutch disease:
– Norway: Large resource revenues are mostly saved in a sovereign wealth fund; fiscal rules, long-term investment strategies, and diversification helped preserve competitiveness in non-resource sectors.

Policy responses and prevention

To reduce the risk or impact of Dutch disease, governments can:
– Save or sterilize resource revenues (sovereign wealth funds, foreign asset accumulation)
– Adopt countercyclical fiscal rules to avoid overheating the economy
– Reinvest resource income in human capital, infrastructure, and productive diversification
– Promote value-added industries through targeted industrial policy and support for innovation
– Manage exchange-rate volatility and consider temporary measures to support tradable sectors

Relation to the resource curse

Dutch disease is one mechanism within the broader “resource curse” concept—the observation that countries rich in natural resources sometimes experience slower economic growth, weaker institutions, or poorer development outcomes. Dutch disease focuses specifically on the real-economy, sectoral and exchange-rate channels.

Key takeaways

• Dutch disease is the weakening of a country’s tradable sectors following a resource boom, usually via currency appreciation and factor reallocation.
• It can be managed through prudent fiscal policy, saving resource revenues, economic diversification, and investment in non-resource competitiveness.
• Institutional choices and deliberate policy design determine whether resource wealth becomes a lasting benefit or a source of economic distortion.

Further reading

• “The Dutch Disease,” The Economist (origin of term)
• IMF studies on resource-rich economies and revenue management
• Research on Norway’s sovereign wealth fund and fiscal rules