Dutch disease and policy adjustments to the oil boom: A comparative study of Indonesia and Mexico

Abstract

Dutch disease and, more recently, resource curse thesis have been critical issues for development of resource abundant economies. This paper attempts a comparison between Indonesia and Mexico in their policy adjustments to the oil boom with special reference to the Dutch disease. There exists a striking contrast, especially in their fiscal, foreign borrowing, and exchange rate policies, and confirms the conventional understanding that a booming government should be conservative, as was the case in Indonesia, in its macroeconomic management to avoid the Dutch disease. Equally significant, investment use of oil revenues to strengthen the tradable sector is another factor responsible for Indonesian success. Mexico provides a clear-cut example of the resource curse thesis, but Indonesia is an exception.