Question

Dutch Disease is a term applied to a problem in the 1970’s whereby the Netherlands were experiencing massive and sudden inflows of capital from abroad. What was the cause of this sudden influx of capital, and what types of potential problems did it have for the Dutch or could it have for any small single resource country? Give an example of a small, single resource country.

Answer 1

Brief Summary:

"Dutch Disease" is a term used to refer to a paradoxical situation which occurs when a good event or discovery harms the economical structure of a country. It may begin with a huge inflow of capital into a country from foreign sources to exploit a newfound resource, which eventually harms its broader economy.

Dutch Disease in Netherlands

Cause:

In the 1950's, when oil prices were quadrupled, more money was available for investment into discovery of oil fields. Eventually, in 1959, there was a discovery of a large natural gas fields in Netherlands - off the coast of Scotland. This resulted in more influx of capital into the country from abroad, essentially strengthening the local currency.

Problems:

With the increase in revenues from the oil exports, the revenue of Netherlands increased significantly and with it the economy of the country. However, with increase in demand, there was an increase in pay rate of employees and eventually this led to a downfall in other industries. This resulted in higher unemployment rates and the ultimate decline in the manufacturing industry.

Examples of single resource countries ( also termed the "Resource Curse"):

1. Norway - rich supply of oil and gas resources
2. Botswana - diamonds
3. Chile - minerals