Dutch disease revisited. Oil discoveries and movements of the real exchange rate when manufacturing is resource-intensive

Abstract

We study how natural resource booms affect the real exchange rate in a situation where there are input–output linkages between the manufacturing sector and the natural resource sector. An increase in revenues from natural resources could de-industrialize an economy by raising the real exchange rate, rendering the manufacturing sector less competitive. This tendency towards de-industrialization has been called “Dutch disease”. We build a theoretical model showing that a country experiencing discoveries of natural resources, such as oil, is not necessarily bound to experience the Dutch disease. The appreciation of the real exchange rate can be escaped if patterns of specialization shift towards the manufacturing industries that use oil more intensively. In the second part of the paper, we test the model and find support for the claim that Dutch disease effect associated with discoveries of natural resources (namely oil) are dampened in countries that specialize in resource-intensive manufacturing industries.