Dutch disease


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.



The Dutch disease is the apparent causal relationship between the increase in the economic development of a specific sector (for example natural resources) and a decline in other sectors (like the manufacturing sector or agriculture). The putative mechanism is that as revenues increase in the growing sector (or inflows of foreign aid), the given nation's currency becomes stronger (appreciates) compared to currencies of other nations (manifest in an exchange rate). This results in the nation's other exports becoming more expensive for other countries to buy, and imports becoming cheaper, making those sectors less competitive.
 
In the long run, these factors can contribute to higher unemployment due to manufacturing jobs being moved to lower-cost countries. The end result is nonresource industries are hurt by the increase in wealth generated by the resource-based industries.

The term "Dutch disease" was coined by The Economist magazine in 1977. The magazine was analyzing a crisis taking place in the Netherlands following discoveries of vast natural gas deposits in the North Sea in 1959. The newfound wealth and massive exports of oil caused the Dutch guilder to rise sharply, making exports of all nonoil products less competitive on the world market. Unemployment rose from 1.1% to 5.1%, and capital investment in the country dropped.


The Kerala Perspective Plan-2030, prepared by the National Council of Applied Economic Research (NCAER), raises the concern that Kerala  state might soon have to deal with the Dutch Disease, a negative development trend pushed by several positive development indicators.


Thursday, 29th Jun 2017, 11:46:50 AM

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