Abstract
Dutch Disease is a condition in which a sudden increase of resource wealth from an extractive sector (such as oil, gas, coal, or mining) undermines other areas of the economy (such as agriculture, manufacturing, or tradeable services), shrinking them while spurring an appreciation in the real exchange rate. Although this may have some positive effects in the short run, Dutch Disease episodes can potentially lead to sectoral concentration and lower economic growth in the long run. This policy brief takes a systematic look at this macroeconomic phenomenon, collects evidence for 83 countries from 1998 to 2017, and summarizes policies that aim to prevent or mitigate Dutch Disease and some of its effects. A long-term perspective to prevent excessive dependence on natural resources and promote broad-based growth should include improvements in institutional governance of natural resource wealth, development of the financial sector to provide risk management products, and diversification of the economy through selective taxes and provision of public goods.
Highlights
Dutch Disease is a condition in which a sudden increase of resource wealth from an extractive sector undermines other areas of the economy, shrinking them while spurring an appreciation in the real exchange rate
This may have some positive effects in the short run, Dutch Disease episodes can potentially lead to sectoral concentration and lower economic growth in the long run
While not all economies facing a sudden influx in natural resource wealth suffer from Dutch Disease, if the structure of the economy becomes more concentrated in extractive activities, the nonextractive sectors could weaken in the short term and eventually collapse, with long-lasting detrimental effects
Summary
Dutch Disease is a condition in which a sudden increase of resource wealth from an extractive sector (such as oil, gas, coal, or mining) undermines other areas of the economy (such as agriculture, manufacturing, or tradeable services), shrinking them while spurring an appreciation in the real exchange rate This may have some positive effects in the short run, Dutch Disease episodes can potentially lead to sectoral concentration and lower economic growth in the long run. A long-term perspective to prevent excessive dependence on natural resources and promote broad-based growth should include improvements in institutional governance of natural resource wealth, development of the financial sector to provide risk management products, and diversification of the economy through selective taxes and provision of public goods
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