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Investopedia / Lara Antal
What Is Dutch Disease?
Dutch disease refers to the economic problems that arise when a country’s currency strengthens sharply, often due to a resource boom, making other export sectors less competitive and weakening long-term growth.
The term originated from the Netherlands’ experience after natural gas discoveries in the 1960s, and similar effects have been seen in countries like Venezuela. While resource windfalls can strain manufacturing and job markets, nations can mitigate Dutch disease by diversifying their economies and using resource revenues wisely, such as through sovereign wealth funds.
Key Takeaways
- Dutch disease refers to the negative impact on a nation’s economy when a natural resource boom leads to a stronger currency and harms other sectors.
- The term originated from the economic crisis in the Netherlands following the discovery of natural gas in 1959, which led to a rise in currency value and a decline in exports.
- Identifiable symptoms include increased currency value, reduced competitiveness of exports, and rising unemployment as jobs move abroad.
- To prevent Dutch disease, diversifying the economy and investing in multiple sectors can help buffer against overdependence on a single resource.
- Norway, by carefully managing resource wealth and economic policy, has successfully avoided the adverse effects of Dutch disease.
The Economic Impact of Dutch Disease
Dutch disease exhibits the following two chief economic effects:1
- It decreases the price competitiveness of exports of the affected country’s manufactured goods.
- It increases imports.
Both phenomena result from a higher local currency.
In the long run, these factors can contribute to unemployment as manufacturing jobs move to lower-cost countries. Meanwhile, non-resource-based industries suffer due to the increased wealth generated by resource-based industries.
The History Behind the Term “Dutch Disease”
The term Dutch disease was coined by The Economist magazine in 1977. The publication had analyzed a crisis that occurred in The Netherlands after the discovery of vast natural gas deposits in the North Sea in 1959. The newfound wealth and massive exports of oil caused the value of the Dutch guilder to rise sharply, making Dutch exports of all non-oil products less competitive on the world market. Unemployment rose from 1.1% to 5.1%, and capital investment in the country dropped.2
Dutch disease became widely used in economic circles as a shorthand way of describing similar situations.
Case Studies of Dutch Disease in Action
In the 1970s, Dutch Disease hit Great Britain when the price of oil quadrupled, making it economically viable to drill for North Sea Oil off the coast of Scotland. By the late 1970s, Britain had become a net exporter of oil, though it had previously been a net importer. Although the value of the pound skyrocketed, the country fell into recession as British workers demanded higher wages and Britain’s other exports became uncompetitive.31
In 2014, economists reported that foreign capital from oil sands might have overvalued Canada’s currency, reducing manufacturing competitiveness. Simultaneously, the Russian ruble greatly appreciated for similar reasons.4 In 2016, the price of oil dropped significantly, and both the Canadian dollar and the ruble returned to lower levels, easing the concerns about Dutch disease in both countries.5
Which Countries Have Avoided Dutch Disease?
Though Norway is rich in the resources, their bureaucracy treads carefully to make pragmatic investing decisions, limit spending, and diversify revenue to help the country avoid the Dutch disease.
How to Solve Dutch Disease?
Dutch disease occurs due to a heavy dependence on a single natural resource. As such, the principal way to prevent such an issue is to diversify the economy by investing in multiple sectors to serve as buffers and supporting domestic producers.
What Is the Difference Between the Resource Curse and Dutch Disease?
Dutch disease is actually an example of resource curse theories which believe that countries rich in natural resources often have worse economic growth and development.
The Bottom Line
Dutch disease describes how a resource boom can drive up a country’s currency, weaken the competitiveness of other exports, and hurt jobs in non-resource sectors. As a form of the broader resource curse, Dutch disease can be tempered through economic diversification and support for domestic industries to reduce reliance on a single resource.
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