Dutch Disease
The Dutch Disease was termed 22 after observing the severe, adverse effect gas discoveries in the Netherlands had on the non-resource traded sector through the macroeconomic channels in the late 1950s. After the discovery of natural gas, the Netherlands recorded a rapid economic growth while the manufacturing sector grew much slower and employment in manufacturing declined significantly. More specifically, the growth rate of the
manufacturing sector declined from an average of 6.5% from 1963-73 to 0.9% from 1974-78
and 0.3% from 1979-83 (Rudd and Lowry 1996). Also, there was a contraction in employment
in the manufacturing sector after the natural gas boom. For instance, the annual average
growth rate of employment in the manufacturing sector was -0.5% from 1963-73, -2.7% from
1974-78 and -2.8% from 1979-83. Many other resource-rich countries face similar experiences
as the Netherlands, leading to the terminology of Dutch Disease to describe the adverse effect
of the booming sector on the lagged sectors.
In a broad sense, the symptoms of the Dutch Disease include the real appreciation of
local currency (nominal appreciation for floating exchange rate and higher inflation for fixed
exchange rate); increases in spending; increase in prices of non-traded goods relative to traded
goods; a shift of endowments from the non-resource traded sector; and bigger current account
deficits (Frankel 2010). Corden and Neary (1982), who developed the first theoretical model23
to examine the effects of the booming sector on the lagged sector, classified these
macroeconomic symptoms into spending and resource movement effects. The model assumes
that the economy comprises of three sectors, viz., traded resource, traded non-resource, and
non-traded sectors. There are two channels of impact from traded resource sector to the rest of
the economy. First, booming resource sector generates large inflows of foreign currencies in
the form of FDI and export revenues. Such boom causes an increase in spending and domestic
demand, and consequently these lead to increasing domestic prices and imports. Increase in