DOCSLIB.ORG

The Impact of Dutch Disease: the Case of Nigeria

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
The Impact of Dutch Disease: the Case of Nigeria Eastern Illinois University The Keep Masters Theses Student Theses & Publications Fall 2019 The Impact of Dutch Disease: The Case of Nigeria Halimat Atinuke Laguda Eastern Illinois University Follow this and additional works at: https://thekeep.eiu.edu/theses Part of the Growth and Development Commons, Natural Resource Economics Commons, and the Other Economics Commons Recommended Citation Laguda, Halimat Atinuke, "The Impact of Dutch Disease: The Case of Nigeria" (2019). Masters Theses. 4669. https://thekeep.eiu.edu/theses/4669 This Dissertation/Thesis is brought to you for free and open access by the Student Theses & Publications at The Keep. It has been accepted for inclusion in Masters Theses by an authorized administrator of The Keep. For more information, please contact [email protected]. THE IMPACT OF DUTCH DISEASE: THE CASE OF NIGERIA Halimat Atinuke Laguda Eastern Illinois University 2019 Thesis Committee Dr Ahmed Abou-Zaid (Advisor) Dr. A Desire Adom Dr. Ali Moshtagh Abstract Nigeria, over the years, has been showing a rapid appreciation of the domestic currency, a rise in real wages and the service sector and a slow-down in the industrial production which are all signs of presence of Dutch disease which predicts that a country with large natural resource rents may experience a de-industrialization and a lower long term economic growth. This paper analyses the impact of Dutch disease in Nigeria Ordinary Least square method, Two-Stage Least Square and Autoregressive Distributed Lag with a system of equation from 1981 to 2017 and found that the real wage rate emphasizes on the labor supply in the economy which checks put one of the assumptions, there is also a decline in the manufacturing sector over the years. Recommendations to Nigeria will, therefore, be to provide more funds to the agricultural sector by giving out loans to interested parties, privatization of the downstream production of oil and diversification of the economy. Acknowledgement First, I would like to thank Almighty God for how far he has brought me in Life and for the successful completion of my master’s degree in Economics. A special acknowledgment goes to my supervisors Dr. A. Desire Adom and Dr Ahmed Abou-Zaid for their immerse support, guidance, time and effort in assisting me to complete my thesis. I also like to thank the thesis committee member Dr. Ali Moshtagh for his thoughtful inputs in my paper. To my parents, Mr and Mrs Laguda, I say a big thank you for supporting me financially and encouraging me to get this degree. In addendum, my sincere gratitude goes to my brothers Olanrewaju Laguda and Oladayo Laguda and my husband Ayodeji George for all their immeasurable support and care throughout my journey at EIU. Finally, I would like to thank my colleagues especially George Anaman, Temiyemi Akinsuyi, Samira Issaka, Freda Opoku-Agyeman, Salim Nuhu, and Tara Adeeko and all my friends and abroad for all the love and support throughout my time at EIU. 3 Table of Contents CHAPTER ONE ............................................................................................................................. 6 INTRODUCTION .......................................................................................................................... 6 1.1 Background ............................................................................................................................... 6 1.2 Justification of Study ................................................................................................................ 8 1.3 Objectives of the Study ............................................................................................................. 8 1.4 Hypothesis................................................................................................................................. 9 1.5 Organization of the Study ......................................................................................................... 9 CHAPTER TWO .......................................................................................................................... 10 LITERATURE REVIEW ............................................................................................................. 10 CHAPTER THREE ...................................................................................................................... 24 BACKGROUND ANALYSIS OF DUTCH DISEASE IN NIGERIA......................................... 24 3.1 Background of Nigeria ............................................................................................................ 24 3.2 Background of Nigeria’s oil and gas ...................................................................................... 27 3.3.1 Symptom 1: Appreciation of the domestic currency ........................................................... 33 3.3.2 Symptom 2: Rise in real wage of the economy ................................................................... 34 3.3.3 Symptom 3: Rise in the service sector ................................................................................. 34 3.3.4 Symptom 4: Slow-down in industrial production ................................................................ 35 CHAPTER FOUR ......................................................................................................................... 36 METHODOLOGY AND DATA .................................................................................................. 36 4.1 Methodology ........................................................................................................................... 36 4.1.1 Model Specification ............................................................................................................. 37 4.2 Data and Sources..................................................................................................................... 39 CHAPTER FIVE .......................................................................................................................... 42 RESULTS AND POLICY RECOMMENDATIONS .................................................................. 42 5.1 Instrument Validity (Sargan Test) .......................................................................................... 42 5.2 Summary Statistics.................................................................................................................. 42 5.3 Unit Root Test Results ............................................................................................................ 49 5.4 Ordinary Least Squares ........................................................................................................... 50 5.5 Autoregressive Distributed Lag Model ................................................................................... 53 5.6 Policy Recommendation ......................................................................................................... 59 CHAPTER SIX ............................................................................................................................. 62 4 CONCLUSION ............................................................................................................................. 62 REFERENCES ............................................................................................................................. 64 APPENDIX ................................................................................................................................... 68 List of Figures Figure 1: Author’s calculations using World Bank data ............................................................... 25 Figure 2: Source: Central Bank of Nigeria, Statistical Bulletin (2017) ........................................ 29 Figure 3: World Development Indicators .................................................................................... 33 Figure 4: World Development Indicators .................................................................................... 34 Figure 5: World Development Indicators .................................................................................... 34 Figure 6: World Development Indicators .................................................................................... 35 List of Tables Table 5. 1 Sargan Test............................................................................................................ 42 Table 5. 2 The Summary Statistics ........................................................................................ 43 Table 5. 3 Unit Root Test ....................................................................................................... 49 Table 5. 4 Ordinary Least Squares ......................................................................................... 50 Table 5. 5 System Equation ................................................................................................... 52 Table 5. 6 Autoregressive Distributed Lag Model ................................................................ 53 Table 5. 7 System Equation: Autoregressive Distributed Lag Model ................................... 56 5 CHAPTER ONE INTRODUCTION 1.1 Background The term “Dutch Disease” was first used in Netherlands when they feared that the end was close for the manufacturing sector when natural gas was discovered in the 1960s. The Dutch disease theory was developed after the Netherlands found large sources of natural gas in the North Sea in the 1960s. Large capital inflows from increased export revenues caused demand
Load more

Recommended publications
  • Natural Resources Volatility and Economic Growth: Evidence from the Resource-Rich Region
    Journal of Risk and Financial Management Article Natural Resources Volatility and Economic Growth: Evidence from the Resource-Rich Region Arshad Hayat 1,* and Muhammad Tahir 2 1 Department of International Business, Metropolitan University Prague, 100 31 Prague, Czech Republic 2 Department of Management Sciences, COMSATS University Islamabad, Abbottabad Campus, Abbottabad 22060, Pakistan; [email protected] * Correspondence: [email protected] Abstract: This research paper investigates the impact of natural resources volatility on economic growth. The paper focused on three resource-rich economies, namely, UAE, Saudi Arabia, and Oman. Using data from 1970 to 2016 and employing the autoregressive distributed lag (ARDL) cointegration approach, we found that both natural resources and their volatility matter from the perspective of growth. The study found strong evidence in favor of a positive and statistically significant relationship between natural resources and economic growth for the economies of UAE and Saudi Arabia. Similarly, for the economy of Oman, a positive but insignificant relationship is observed between natural resources and economic growth. However, we found that the volatility of natural resources has a statistically significant negative impact on the economic growth of all three economies. This study contradicts the traditional concept of the resources curse and provides evidence of the resources curse in the form of a negative impact of volatility on economic growth. Keywords: natural resources; volatility; economic growth; ARDL modeling; GCC Citation: Hayat, Arshad, and Muhammad Tahir. 2021. Natural Resources Volatility and Economic 1. Introduction Growth: Evidence from the Resource- Looking at the UN human development report (2015), we can see that major oil and Rich Region.
    [Show full text]
  • The Quality of Industrial Policy As a Determinant of Middle Income Traps and How Government Can Improve It
    The Quality of Industrial Policy As a Determinant of Middle Income Traps and How Government Can Improve It Policy Design and Formulation in Developing Countries Nations Are Not Equal, and Policy Learning Is Critical • Development performance differs greatly across nations. Some quickly reach high income while others slow down or stagnate at low or middle income. • In my view, this fundamentally reflects differences in private dynamism and policy quality—not amounts of aid, trade, FDI, natural resources; not even colonial history or difficulties at the time of independence. • Nations must learn mindset (heart) and method (brain) to attain high growth. Active and wise policy is needed. • If you don’t know how to learn policies, international comparison, attention to details and proper tutoring by foreign experts are recommended methods. Learning to Industrialize: How Nations Learn: Techno- From Given Growth to Policy- logical Learning, Industrial aided Value Creation Policy, and Catch-up By Kenichi Ohno Routledge (2014) Edited by Arkebe Oqubay & Kenichi Ohno Open Access (free download) Oxford University Press (2019) This book proposes a pragmatic way of Middle-income economies are many, but economic development which features very few have risen to attain truly high policy learning based on a comparison of income and technology leadership. The international best practices. Countries book examines key structural and wanting to adopt effective industrial contingent factors that contribute to strategies but not knowing where to start dynamic learning and catch-up. will benefit greatly by Rejecting both the “one- the ideas and hands-on size-fits-all” approach examples presented. and the agnosticism Policy learning that all nations are experiences in Meiji unique and different, it Japan, Singapore, uses historical as well as Taiwan, Malaysia, firm, sector and country Vietnam and Ethiopia evidence to identify the are discussed in sources and drivers of concrete detail.
    [Show full text]
  • 2 the Dutch Disease 5
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Algieri, Bernardina Working Paper The effects of the Dutch disease in Russia ZEF Discussion Papers on Development Policy, No. 83 Provided in Cooperation with: Zentrum für Entwicklungsforschung / Center for Development Research (ZEF), University of Bonn Suggested Citation: Algieri, Bernardina (2004) : The effects of the Dutch disease in Russia, ZEF Discussion Papers on Development Policy, No. 83, University of Bonn, Center for Development Research (ZEF), Bonn This Version is available at: http://hdl.handle.net/10419/84735 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content
    [Show full text]
  • A Policymaker's Guide to Dutch Disease
    Working Paper Number 91 July 2006 A Policymakers’ Guide to Dutch Disease By Owen Barder Abstract It is sometimes claimed that an increase in aid might cause Dutch Disease—that is, an appreciation of the real exchange rate which can slow the growth of a country’s exports— and that aid increases might thereby harm a country’s long-term growth prospects. This essay argues that it is unlikely that a long-term, sustained and predictable increase in aid would, through the impact on the real exchange rate, do more harm than good, for three reasons. First, there is not necessarily an adverse impact on exports from Dutch Disease, and any impact on economic growth may be small. Second, aid spent in part on improving the supply side—investments in infrastructure, education, government institutions and health—result in productivity benefits for the whole economy, which can offset any loss of competitiveness from the Dutch Disease effect. Third, the welfare of a nation’s citizens depends on their consumption and investment, not just output. Even on pessimistic assumptions, the additional consumption and investment which the aid finances is larger than any likely adverse impact on output. However, the macroeconomic effects of aid can cause substantial harm if the aid is not sustained until its benefits are realized. The costs of a temporary loss of competitiveness might well exceed the benefits of the short-term increase in aid. To avoid doing harm, aid should be sustained and predictable, and used in part to promote economic growth. This maximizes the chances that the long-term productivity and growth benefits will offset the adverse effects—which may be small if they exist at all—that big aid surges may pose as a result of Dutch Disease.
    [Show full text]
  • The Paradox of Transfers: Distribution and the Dutch Disease. ∗
    The Paradox of Transfers: Distribution and the Dutch Disease. ∗ Nazanin Behzadan,† Richard Chisik‡ November 12, 2020 Abstract In this paper we analyze the effect of within-country income inequality on economic outcomes. In particular, we develop a new model of international trade with non- homothetic preferences whereby within-country income distribution affects the pattern of trade and economic growth. Alternative forms of foreign transfers, such as foreign aid and remittances, interact with the income distribution in dissimilar manners, which in turn generates differences in spending patterns, the real exchange rate, production patterns, and the pattern of international trade. In a three sector model with interna- tional trade and production we show that while remittances can foster economic growth, foreign aid can cause economic stagnation. An appreciation of the real exchange rate inducing a production shift to the sector with less long-run growth potential is known as the Dutch disease and in our model the disease is triggered by within-country income differences and the form of the foreign transfer. We empirically verify these hypotheses with data from a panel covering the years 1991-2009 while controlling for the issues of omitted variable bias and the possible endogeneity of foreign aid and remittances. JEL Classification: F11, F24, F35, D31 Keywords: International Trade, Inequality, Foreign Aid, Remittances, Dutch Disease ∗We would like to thank seminar participants at the 2018 Canadian Economics Association meetings and the 2018 Institutions, Trade and Economic Development workshop for useful comments on this paper and seminar participants at Ryerson University, the 2017 Western Economics Association International annual conference, the 2017 Atlantic Canada Economics Association meetings, the 2016 Canadian Economics Asso- ciation meetings, and the 2016 Midwest International Trade Meetings for comments on an earlier version of this paper.
    [Show full text]
  • Escaping the Natural Resource Curse and the Dutch Disease? Norway's Catching up with and Forging Ahead of Its Neighbors
    Erling Røed Larsen Escaping the Natural Resource Curse and the Dutch Disease? Norway's Catching up with and Forging ahead of Its Neighbors Growth studies show, counter to intuition, that the discovery of a natural resource may be a curse rather than a blessing since resource-rich countries grow slower than others. Moreover, resource abundance may involve a displacement of a growth-essential manufacturing sector, leading to Dutch Disease. Norway is an important exception to the curse and the disease. Since oil production started in 1971 its overall growth has been remarkable side-by-side with phenomenal oil exports. At the same time, manufacturing has been performing well. This article uses neighbor countries Denmark and Sweden to highlight Norway's relative development. The article employs structural break techniques to demonstrate that Norway started a sudden acceleration in 1974, three years after having started oil extraction, and never slowed down. After catching- up with its neighbors, Norway surprisingly maintained a higher pace, and appears to have escaped the curse and the disease. This article establishes the fact through rigorous hypothesis testing before examining explanations of why Norway did escape. JEL Classification: C22, N10, O10, Q33 Key words: booming sector, catch-up, development, Dutch Disease, economic convergence, growth, natural resource curse, oil discovery, structural break Acknowledgement: I am grateful to insightful conversations with and comments on an earlier version of the paper from Ådne Cappelen, valuable suggestions from Hilde C. Bjørnland, Clair Brown, Knut Einar Rosendahl, Thor-Olav Thoresen, and Wei-Kang Wong, ideas from Ian McLean, and grants from the Norwegian Research Council, project no.
    [Show full text]
  • Dutch Disease Or Agglomeration? the Local Economic Effects of Natural Resource Booms in Modern America
    NBER WORKING PAPER SERIES DUTCH DISEASE OR AGGLOMERATION? THE LOCAL ECONOMIC EFFECTS OF NATURAL RESOURCE BOOMS IN MODERN AMERICA Hunt Allcott Daniel Keniston Working Paper 20508 http://www.nber.org/papers/w20508 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 September 2014, Revised June 2017 We thank Yunmi Kong and Wendy Wei for superb research assistance and Julia Garlick for help in data preparation. We are grateful for feedback from Costas Arkolakis, Nathaniel Baum- Snow, Dan Black, Rick Hornbeck, Guido Imbens, Ryan Kellogg, Pat Kline, Erin Mansur, Enrico Moretti, Reed Walker, and seminar participants at the ASSA Annual Meetings, Bates White, Berkeley, Bocconi, the Census Center for Economic Studies, Centre de Recherche en Economie et Statistique, Cornell, Helsinki Center of Economic Research, LSE and UCL, Michigan State, NYU, Oxford, Sussex, Toulouse, Wharton, the World Bank, and Yale. Thanks also to Randy Becker, Allan Collard-Wexler, Jonathan Fischer, Todd Gardner, Cheryl Grim, Javier Miranda, Justin Pierce, and Kirk White for their advice and help in using U.S. Census of Manufactures data, and to Jean Roth for advice on the Current Population Survey. Any opinions and conclusions expressed herein are those of the authors and do not necessarily represent the views of the U.S. Census Bureau or the National Bureau of Economic Research. All results have been reviewed to ensure that no confidential information is disclosed. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
    [Show full text]
  • Creating Markets in Angola : Country Private Sector Diagnostic
    CREATING MARKETS IN ANGOLA MARKETS IN CREATING COUNTRY PRIVATE SECTOR DIAGNOSTIC SECTOR PRIVATE COUNTRY COUNTRY PRIVATE SECTOR DIAGNOSTIC CREATING MARKETS IN ANGOLA Opportunities for Development Through the Private Sector COUNTRY PRIVATE SECTOR DIAGNOSTIC CREATING MARKETS IN ANGOLA Opportunities for Development Through the Private Sector About IFC IFC—a sister organization of the World Bank and member of the World Bank Group—is the largest global development institution focused on the private sector in emerging markets. We work with more than 2,000 businesses worldwide, using our capital, expertise, and influence to create markets and opportunities in the toughest areas of the world. In fiscal year 2018, we delivered more than $23 billion in long-term financing for developing countries, leveraging the power of the private sector to end extreme poverty and boost shared prosperity. For more information, visit www.ifc.org © International Finance Corporation 2019. All rights reserved. 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 www.ifc.org The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon. The findings, interpretations, views, and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the Executive Directors of the International Finance Corporation or of the International Bank for Reconstruction and Development (the World Bank) or the governments they represent.
    [Show full text]
  • IOB Evaluatie | Nr
    IOB Evaluatie | nr. 382 IOB Evaluatie | nr. IOB Evaluatie Op zoek naar nieuwe verhoudingen Evaluatie van het Nederlandse buitenlandbeleid in Latijns-Amerika IOB Evaluatie | nr. 382 | Op zoek naar nieuwe verhoudingen | IOB Evaluatie | nr. 382 | Op zoek naar nieuwe verhoudingen | IOB Evaluatie | nr. 382 | Op zoek naar nieuwe verhoudingen | IOB Evaluatie | nr. 382 | Op zoek naar nieuwe verhoudingen | IOB Evaluatie | nr. 382 | Op zoek naar nieuwe verhoudingen | IOB Evaluatie | nr. 382 | Op zoek naar nieuwe verhoudingen | Op zoek naar nieuwe verhoudingen IOB Evaluatie Op zoek naar nieuwe verhoudingen Evaluatie van het Nederlandse buitenlandbeleid in Latijns-Amerika augustus 2013 Op zoek naar nieuwe verhoudingen Voorwoord Terwijl het pessimisme over het herstel van de bedrijvigheid in Nederland aanhoudt, verschenen deze zomer in de pers meerdere berichten over nieuwe orders voor Nederlandse bedrijven in de maritieme en offshoresector vanuit Brazilië. Kort daarna bracht het Mexicaanse bedrijf América Móvil een bod uit om een meerderheidsbelang in het voorma- lige staatsbedrijf KPN te verwerven. Deze voorbeelden geven aan hoezeer de economische situatie in Nederland thans verbonden is geraakt met ontwikkelingen in Latijns-Amerika. Deze evaluatie maakt een balans op de resultaten van het Nederlandse buitenlandbeleid in Latijns-Amerika gedurende de afgelopen jaren. Dit beleid is flink in beweging geweest. Eerst vanwege de afbouw van de Nederlandse ontwikkelingssamenwerking en de verminderde bilaterale inzet voor mensenrechtenbevordering. Daarna
    [Show full text]
  • The Dutch Disease
    From International Competitiveness of the Russian Federation THE DUTCH DISEASE Thereafter, the Dutch Disease has been used to The term Dutch Disease refers to the adverse explain economic performance of countries facing effects on manufacturing of natural resource 2 “discoveries”. Specifically, when a country similar conditions . The core Dutch Disease model, attributed to experiences a resource boom due to a tradable resource discovery and/or to an increase in a Corden and Neary (1983), is modelled within the framework of a three-sector economy, namely a resource price, it normally undergoes a real appreciation of its exchange rate and, as a result of non-tradable sector (N), a manufacturing sector rising wages, a relocation of some of the labour (M) and a resource sector (R). The model assumes that: force to the resource sector. A real appreciation reduces the international competitiveness of other • labour is perfectly mobile among all the tradable sectors because resource-based exports three sectors and makes sure that wages crowd out commodity exports produced by those equalise sectors (Krugman, 1987). The country faces the across them; risk of a de-industrialization process1. This • all goods are for final consumption; phenomenon, known as the “Dutch Disease”, first • trade is always balanced as national drew attention in the late 1950s when natural gas output always equals expenditures; and discoveries in the Netherlands eventually hurt the • commodity and factor prices are not competitiveness of the Dutch manufacturing distorted. sector. A resource boom affects the rest of the economy through two channels: the resource Origins of the Dutch disease movement effect and the spending effect.
    [Show full text]
  • The Netherlands Energy Report April 2010 the NETHERLANDS: the Energy Hub of Europe
    The Netherlands Energy report April 2010 The NETHERLANDS: the energy hub of Europe or centuries, the industrious Dutch have made their fortune from a passionate relationship F with the sea. This tiny country in the north west of Europe, squeezed between the North Sea and, at times, expansionist neighbors, has forged its national identity over a strong maritime vocation. The Dutch have sailed the world as conquerors and merchants, reclaimed at least a quarter of their land from the sea, which they protect with man-made barriers, and, more recently, successfully exploited the oil and gas riches under their waters. This sponsored supplement was produced by Focus Reports. Project Director: Julie Avena. Editorial Coordinator: Henrique Bezerra. Project Assistant: Olivia Scarlett. Graphic Assistant: Courtesy of Port of Rotterdam Omar Rahli. For exclusive interviews and more info, log onto energy.focusreports.net or write to [email protected] April 2010 Oil & Gas Financial Journal • www.ogfj.com 53 For centuries, the industrious For almost fifteen years Dutch gas production (oil production was Dutch have made their fortune insignificant in relative terms) was almost entirely dependent upon from a passionate relationship with the Groningen gas field. Nevertheless, following the first oil crisis in the sea. This tiny country in the 1973-1974 the Dutch government designed a new energy policy, north west of Europe, squeezed which saved Groningen as a strategic reserve to be used over a lon- between the North Sea and, at ger period, and promoted the exploitation of marginal fields via the times, expansionist neighbors, has Small Fields Policy (SFP).
    [Show full text]
  • Dutch Disease Milan Brahmbhatt, Otaviano Canuto, and Ekaterina Vostroknutova 1 Public Disclosure Authorized
    POVERTY THE WORLD BANK REDUCTION AND ECONOMIC MANAGEMENT NETWORK (PREM) Public Disclosure Authorized Economic Premise JUNE 2010 • Number 16 Dealing with Dutch Disease Milan Brahmbhatt, Otaviano Canuto, and Ekaterina Vostroknutova 1 Public Disclosure Authorized This note looks at so-called Dutch disease, a phenomenon reflecting changes in the structure of production in the wake of a favorable shock (such as a large natural resource discovery, a rise in the international price of an exportable commodity, or the presence of sustained aid or capital inflows). Where the natural resources discovered are oil or minerals, a contraction or stagnation of manufacturing and agriculture could accompany the positive effects of the shock, according to the theory. The note considers channels through which such natural resource wealth can affect the economy. It also focuses on the development implications of Dutch disease, particularly the potential negative effects related to productivity dynamics and volatility; and concludes with a summary of possible policy responses, including the mix of fiscal, exchange rate, and structural reform policies. Public Disclosure Authorized The recent boom in primary commodity prices has once such as increasing returns to scale, learning by doing, or pos - more stimulated interest in the issue of “Dutch disease.” This itive technological externalities. Concerns about Dutch dis - term refers to changes in the structure of production that ease may also arise in the context of large, sustained private are predicted to occur in the wake of a favorable shock, such capital or foreign aid inflows (Auty 2001). as discovery of a large natural resource or a rise in the inter - This note lays out a basic model of Dutch disease, follow - national price of an exportable commodity that is perceived ing Corden and Neary (1982), and considers channels to be permanent.
    [Show full text]