Dutch Disease Research Articles

Premature deindustrialization: A cautionary note

This paper presents a simple model of structural change in an isolated economy. As the economy industrialises the employment share of manufacturing increases. It eventually peaks and thereafter decreases. Simulations with this model indicate that faster growth in manufacturing productivity implies a lower and earlier peak in this sector’s employment share. The model is extended to include a late industrialiser that acquires technology from a more advanced leader. No matter when it occurs, the decline of manufacturing in this model is never premature. It is the outcome of technical dynamism in the manufacturing sector. The model can be extended to include external trade. Manufacturing then becomes vulnerable to the Dutch disease; whereby locally produced manufactures are replaced by imports. Such effects may occur at any stage of development. The theoretical discussion is followed by a brief examination of the South American experience that illustrates the effects of the Dutch disease. The paper concludes by examining the share of manufacturing in constant price GDP. On balance, the evidence supports Rodrik’s (2016) claim that this share is now on the decline in the advanced economies.

Intermediate inputs in Dutch disease. Copper in Chile

PurposeBy means of a practical model, the paper discusses the role of intermediate inputs in the ability of a booming extractive sector to draw resources out of lagging sectors, giving rise to Dutch disease. MethodsThe model is for the Chilean economy and follows an ‘extended’ input-output structure, with 35 production sectors. Once calibrated and parameterized, the model can be solved numerically to estimate the resource movement effect and the spending effect of a copper boom. FindingsThe numerical exercises show that, when the use of intermediate inputs is taken into account, the resource movement effect is of similar magnitude to the spending effect in explaining deindustrialization in Dutch disease. The key mechanism here is that, when the copper sector expands, its effects on real wages and good prices can be significant, due to the use of intermediate inputs. ImplicationThis implies that the policies that are commonly recommended to avoid Dutch disease (fiscal rules, sovereign wealth funds, etc.) may not be very effective if they are not accompanied by others aimed at promoting greater provision or efficient use of scarce resources. OriginalityThe present study contributes to the literature on Dutch disease in two ways. On the one hand, it provides an estimate of the resource movement effect and the spending effect of a commodity boom. On the other hand, it provides evidence in favour of the hypothesis that extractive activities can lead to direct deindustrialization.

The Nexus between Illicit Financial Flows and Tax Revenue: New Evidence from Resource-Rich African Countries

Resource-rich economies, especially those in Africa, are plagued with the resource curse and Dutch Disease syndromes, which undermine the quest for effectively mobilizing domestic resources toward sustainable and inclusive development. Empirical evidence on the role illicit financial flow (IFF) plays in this regard is relatively scarce. Thus, this study evaluates the volume of IFF and its effect on tax revenue in seven resource-rich African countries. Panel data, sourced for the 2009-2021 period, were analysed using the fixed effect and random effect models while the Instrumental Variable Generalised Method of Moment (IV-GMM), a dynamic estimator, was used for robustness check. Findings revealed that IFF has been on the rise and has detrimental effects on the tax revenue of the sampled countries’ national governments. This is inimical to sustainable development. Thus, the governments and policymakers in these countries must develop pragmatic policy and institutional approaches toward tackling the IFF menace.

Does official development assistance (ODA) cause the Dutch disease in developing countries

PurposeThis paper aims to investigate whether official development assistance (ODA) inflows to developing countries (lower-middle and low income) can cause the symptoms of Dutch disease or not.Design/methodology/approachThis study applies the methodology of dynamic panel data estimation with a one-step system generalized methods of moment (GMM) for the sample of 59 developing countries from 2001 to 2019.FindingsThe results indicate that ODA (as a percentage of gross domestic product (GDP)) rises by 1%, the real effective exchange rate (REER) appreciates by 0.252%. This finding reveals that these selected developing countries have faced the symptoms of Dutch disease. The countries with the higher ODA ratio have a higher effect of the Dutch disease, and the managed floating exchange rate regime is the lowest impacted, when compared to the fixed and flexible exchange rate.Practical implicationsThe selected countries are recommended to use ODA inflows right and efficiently. These ODA inflows should be invested in productive sectors or support for production rather than in consumption. The managed float exchange rate regime is applied to reduce the symptom of Dutch disease for the selected countries. The good cooperation of monetary and fiscal policies is important to absorb the huge ODA inflow and sterilize the adverse effects of the disease.Originality/valueThe paper contributes to the literature and empirical of the Dutch disease. An adverse effect of the huge ODA inflow to the developing countries appreciated of the real exchange rate and caused the symptom of the dutch disease.Peer reviewThe peer review history for this article is available at: https://publons.com/publon/10.1108/IJSE-12-2022-0777

The Effect of Dutch Disease VS New Paradigm of Tourism Development (Case Study of Changes in Bali's Economic Structure)

This article aims to explain the possible effects of Dutch Disease (DD) on tourism development in Bali, and how the new paradigm of tourism development can counter the DD effect. As is known, the development of this sector has brought tourism to become a leading sector for Bali's economic growth. However, this condition in the long term is a sign that Bali is starting to experience a significant DD effect, where growth in key sectors hampers growth in other sectors and may even slow down the overall growth rate of the regional economy. Using descriptive analysis techniques, this article utilizes data sharing data on agricultural sector growth and labor profile by sector in the Province of Bali, in describing how the possible effects of the Dutch disease on the Bali economy occurred.

Sovereign risk and Dutch disease

I study how, in the presence of default risk, the Dutch disease amplifies an inefficiency in the sectoral allocation of capital. In a sovereign default model with commodities and production of traded and non-traded goods, default incentives increase when more capital is allocated to non-traded production. Households do not internalize this, giving rise to an inefficiently large non-traded sector. Commodity windfalls amplify this inefficiency through the classic Dutch disease mechanism. I characterize state-contingent subsidies that implement the efficient allocation and compare them to a simpler subsidy rule that ameliorates the externality. Evidence from spreads, natural-resource rents, and sectoral investment data support the main findings of the model.

Cyclicality of public debt in developing countries: Does dependence on natural resources matter?

We revisit the resource curse theory, producing empirical evidence of the importance of natural resources on the cyclical orientation of public debt. Using the Driscoll-Kraay fixed-effects method and panel data from 51 developing countries for the period 1986 to 2020, we show that natural resource rents accentuate the procyclicality of public debt. However, our results suggest that the impact of natural resource endowment in procyclicality does not have the same magnitude when taking into account (i) the disaggregation of public debt, (ii) alternative measures of natural resource rent and (iii) the division of the sample into African and non-African countries. More specifically, natural resource rents amplify the procyclicality of external public debt more than domestic public debt. In addition, we find that while coal and forest rents have no effect on the cyclical orientation of public debt, mineral and especially oil rents do amplify the procyclical nature of public debt. Finally, our results show that the accentuation of the procyclical nature of public debt generated by the interaction between the economic cycle and natural resource endowment is more pronounced in African developing countries than in non-African developing countries. Our results shed new light on the Dutch disease hypothesis, and have relevant policy implications for governments in resource-rich countries wishing to move towards counter-cyclical fiscal interventions.

Effect of Dutch Disease on the Agricultural Sector in Nigeria: An ARDL Approach

Effect of Dutch Disease on the Agricultural Sector in Nigeria: An ARDL Approach

Is the Dutch disease well and alive? A cross-country assessment of mining spillovers on employment in the 2002–2014 period

Following the Dutch disease model of Corden and Neary (1982), the expansion of a booming extractive sector crowds out employment in key sectors, i.e., manufacturing. To this day, these potential negative labor spillovers remain a cause of concern for policymakers. Empirical literature has explored this question by focusing on regional dynamics of employment, but country-wide effects remain understudied. This paper explores the mining sector's employment spillovers at the national level over the 2002–2014 period. Using data from WIOD, we employ Moretti's (2010) specification, as extended in Fleming and Measham (2014), and adopt a GMM model to address potential endogeneity issues. Following the decomposition in Foster-McGregor (2019), we differentiate mining employment expansion based on a) changes in domestic demand and b) changes due to exports. Along with regional studies, our results indicate that there is no evidence of negative spillovers on manufacturing jobs, regardless of the source of mining jobs expansion (domestic or exports). Such results hold even in countries with relatively low levels of manufacturing output. We do find some evidence of negative effects in agriculture, and positive effects on construction and services; this, however, seems to hold only in countries with relatively low manufacturing output. Findings also suggest that positive elasticities at the national level, when observed, are quite moderate: e.g., a 10% increment in mining employment leads to a 1.1%–1.4% increment in construction employment.

Resource booms and the energy transition: What can we learn from Dutch economists' response to the discovery of natural gas reserves (1959–1977)?

Geopolitical instability and climate change are about to bring about large-scale energy reconfigurations. Recent discoveries of fossil fuel potential echo important historical episodes, starting with the finding of natural gas reserves in the Netherlands in 1959, which gave birth to the notion of Dutch Disease, in reference to the macroeconomic structural readjustments that followed the resource boom. Recently, the economic literature on whether such a boom might be a blessing or a curse for a country has been growing. What has not received attention so far is the attitude of Dutch economists in the 1960s and 1970s and the lessons to be drawn from them in today's economic research. This article explores how they understood the gas boom, how they anticipated its effects, and the role they played in shaping Dutch energy policies. We show that the 1960s were a parenthesis, and that energy optimism has historically been more an exception than a rule. In situ economists correctly anticipated some but not all of the transmission channels of the resource boom. These results are insightful for the 21st century, as they not only allow for historicizing the concept of the resource curse but also provide lessons for macroeconomic policies in the context of the energy transition, especially in countries endowed with fossil fuels and mineral resources.

Dutch Disease and the Future of the GCC Economies

Dutch disease happens when a country's economy becomes overly reliant on the export of a single natural resource. This can have various negative implications, including the weakening of other sectors of the economy, a rise in the currency's value, and an increase in the cost of living. This research investigates the evidence for Dutch Disease in the Gulf Cooperation Council (GCC) nations. According to the study's findings, there is some indication that Dutch Disease exists in these nations. The positive connections between gas production, raw petroleum output, and GDP suggest that increasing production of these commodities leads to economic expansion, as measured by GDP. However, the considerable negative link between the percentage of non-petroleum exports and the consumer price index shows that the nonpetroleum export industry tends to diminish as gas and petroleum output grows. The study's conclusions have a variety of ramifications for the GCC countries. For starters, it proposes that the government avoid using oil and gas earnings to fuel excessive government expenditure. That might lead to Dutch Disease and undermine the economy's nonoil sector. Second, the government should adopt initiatives to encourage non-oil exports. This might include initiatives that encourage non-oil exports or aid in diversifying the economy away from natural resources.

The Impacts of Remittances on Foreign Reserves of Pakistan: Does Pakistan Suffer from Dutch Disease?

The Impacts of Remittances on Foreign Reserves of Pakistan: Does Pakistan Suffer from Dutch Disease?

Remittances and the Dutch Disease: an empirical analysis in the context of Ethiopia

Remittances and the Dutch Disease: an empirical analysis in the context of Ethiopia

Analyzing the impact of eco-friendly bonds on economic growth and environmental sustainability

In recent decades, a noticeable uptick has been seen in the issuing of eco-friendly bonds across green, social, and sustainable categories. The study examines their intersection with economic expansion and sustainability using panel data from 82 countries analyzed through robust fixed-effects estimators. The results reveal a significant positive correlation between the issuing of eco-friendly bonds and economic growth. Interestingly, a negative relationship emerges between bond performance and growth, suggesting that the mere issuing of bonds may not be enough to ensure sustainable economic expansion. The importance of refined valuation methods for these bonds is emphasized, along with the risk of economic imbalance caused by the uneven distribution of bond investments across sectors, akin to the "Dutch disease." The need to align investment strategies with both economic and environmental objectives to address challenges like persistent carbon emissions is also stressed. The authors advocate the integrating of considerations of bond issuance and performance into long-term sustainability strategies. Despite holding potential for positive environmental impact, eco-friendly bonds may not consistently drive economic growth as initially anticipated, particularly when balancing the development and carbon-reduction objectives.

Nexus between fintech, green finance and natural resources management: Transition of BRICS nation industries from resource curse to resource blessed sustainable economies

This article offers a comprehensive overview of the rapidly expanding literature on the resource curse phenomenon, in which nations wealthy in natural resources (such as the BRICS) have slower rates of sustainable monetary growth compared to those with less natural resources. This study lays the groundwork for the future of green finance by creating a theoretical basis for the application of fintech to the financial sector. Furthermore, the current research study contributes a fresh paradigm to the natural resource curse literature by exploring the investment and real exchange rate channels, by which green investment and green financing help to alleviate the resource curse. The study proposes a decision-making framework for executives in resource and non-resource sectors subject to the governments of BRICS nations. The research shows that if BRICS nations increase their green investment, they may break free of the resource curse that has plagued them. Findings also show that the development of highly competitive green goods and practices may impede real exchange appreciation, which is consistent with the Dutch disease theory (DDT). The results show, in the end, that the divergent policies of BRICS countries, based on Resource curse theory (RCT) and DDT, would steer enterprise managers towards attaining resource benefit together with sustainable social welfare objectives. Present findings from the study will steer the banking sector strategies to optimise the loan allocation of cash schemes while enabling assessment and supervisory initiatives for coordinating the green transition and strengthening amongst sectors (resource and non-resource). In order to direct the green development of the financial sector and services into the actual economy, green finance policies must be updated and put into practice on a frequent basis. Finally, the current study's management implications include directing industry strategies towards sustainable economic development where the elements responsible for unsustainable economic growth are identified using RCT and DDT.

Unveiling the Dutch Disease Indexes: Principal Component Analysis in a Small Oil-rich Country

The Dutch disease (DD) theory is a popular approach when analyzing the economies of resource-rich countries. However, despite the extensive examination of both the original DD theory and its variations in numerous country cases, the findings remain contradictory and inconclusive, primarily due to the challenges associated with measuring DD. Building upon the notable case study of the Azerbaijani economy, this paper introduces a novel way to utilise principal component analysis (PCA) in index development, which incorporates the modelling framework of the original theory and provides a profound understanding of DD measurement. The findings of the study reveal that the fundamental variables associated with DD in the Azerbaijani economy can be effectively condensed into a small number of principal components (PCs). In addition, this research introduces not only a total Dutch disease index (TDDI), but also a resource movement index (RMI) and a spending index (SI), with the last of these demonstrating a more pronounced impact in Azerbaijan. The estimated indexes exhibit a significant and negative correlation with the manufacturing sector’s share in the industry, pointing to the presence of the crowding-out mechanism of DD. Moreover, a strong positive correlation is observed with key growth indicators such as gross domestic product (GDP) and gross capital formation, underscoring the exceptional role of the oil boom in the Azerbaijani economy. These findings justify the contention that DD is present in the Azerbaijani economy. The paper also provides a composite index that can be utilised by both policymakers and scholars for measuring DD.

A test of the tourism Dutch disease hypothesis in developing countries

In this study, we examine whether tourism can appreciate real exchange rates in developing countries. We use Fiji as a case study with annual data from 1980 to 2019. We apply the recently developed Fourier ARDL model which automatically corrects for the effects of structural breaks. The results indicate that tourism entails real exchange rate appreciation pressure. This effect is present with positive tourism shocks in expansionary periods. Tourism exerts a marginally stronger downward pressure on real exchange rates with negative tourism shocks during recessionary periods. Negative tourism shocks in expansions and positive tourism shocks in recessions do not influence real exchange rates. The implication is that whether tourism leads to an appreciation of real exchange rates depends on the relevant phase of the business cycle.

The impact of energy prices on inflation and economic growth in Mozambique: A wavelet approach and OLS estimator

AbstractThe paper is using the Continuous Wavelet Transform (CWT) and the OLS estimator to examine the relationship between energy prices (coal and gas), inflation and economic growth in Mozambique. Coal and gas are the primary commodity and source of revenue for the country. The research uses quarterly data from 2001 to 2022. Among other results, we found evidence of high coherence between macroeconomic variables (inflation and real GDP growth rate) and energy prices (thermal coal and natural gas prices) only for the frequency intervals between 1.5 and 4 years (short term). The results hold even after controlling for the real GDP growth and exchange rate; we concluded that only in the short term (1.5–4 years), there is high coherence between energy prices and inflation in the time interval between 2004 and 2012. This finding indicates no relation between energy prices, inflation and economic growth in Mozambique. Furthermore, the OLS estimates substantiate the wavelet result, showing no impact. In this context, we can conclude that there is probably a ‘Dutch disease’ or ‘resource curse’ that negates the positive effects of exploiting these resources on short‐ and long‐term economic growth.

Pakistan: Withholdingisation of the Economic System—A Source of Revenue, Civil Strife, or Dutch Disease+?

The paper takes an incisive shot at the systemic inadequacies that have tiptoed into the economic order of the state over time via the apparently innocuous mechanism of withholding taxes. Withholding tax—a legitimate instrument of preponing the state revenues on clearly identifiable chunks of incomes—has historically been resorted to by most states, and to that extent it should be normal with Pakistan, too. However, what has happened in Pakistan is that the tool of withholding taxation has been used as a source of revenues way too large in scale, size, scope and intensity. In addition to the pulling forward of tax collection on clearly demarcated chunks of incomes, a large number of transactions have also been roped into its nexus and then charged to tax by presumptivising gross receipts as income—a withholdingisation of the sorts not only of the tax system but of the entire economic system as a weighty portion of ubiquitous withholding taxes gets stuck into the pricing structure of the final goods and services produced in the economy rendering them price-incompetitive in the international market. This overwhelming withholdingisation of the economic system, it is argued, has been brought about by a numb state continually operating under, using a Freudian framework, the “pleasure principle” instead of the “reality principle” with political governments complacently choosing to continue harvesting quick bucks into the exchequer, pushing the extractive system into a total disarray, the society into burgeoning civil strife, and the economy to the Dutch Disease effect.

Dutch disease perspective of energy sector: Natural resources and energy sector nexus with the role of renewable energy consumption

The issue of climate change has fascinated consideration from policy makers in recent years. Energy efficiency is a crucial solution to climate change due to its ability to reduce the amount of energy needed to produce goods by transforming the energy systems. Currently, China is the top energy user in the globe. As the country continues to experience rapid economic growth and industrialization, its demand for energy continues to increase, leading to concerns about energy efficiency. Natural resources have traditionally been the main sources of energy for many countries, including China. The availability of excessive natural resource rents might, in most cases, be beneficial to the shift towards renewable energy. This study explores the effect that natural resource rents on the energy efficiency of China over the period of 1990–2021. This study helps formulate efficient energy policies and strategies by investigating the linkage between resource rents and energy efficiency in China. Using quantile regression approach, the findings of this study give insightful information regarding the connection between natural resource rents and energy efficiency in China. The results show that an increase in forest rents improves energy efficiency. On the contrary, natural gas rents, GDP and renewable energies worsen energy efficiency in China. Based on the results, this study recommends that policies should priorities sustainable forest management practices, including afforestation, reforestation, and conservation measures.