Question

Critically comment on the following statements as they refer to middle-income developing countries (1 page )

"If dutch disease is not neutralized, a countries current account may be nonetheless in equilibrium. However, if the dutch disease is fully neutralized, the current account will definitely be in surplus."

Answer 1

Dutch disease is country's chronic exchange rate caused by exploitation of cheap resource, which are available in huge quantity, whose production and export with appreciated exchange rate than the exchnage rate which makes it internationally competitive other business in the tradable sector. It is a structural phenomenon that creates hinderances to the industrialisation or if it was neutralised then it would provoke deindustrialisation.

It is a market failure and it creates negative externalities in economy's tradable good and services and stop them from growing inspite of using the best technology and best administrative practices. Even the currency crises aren't able to correct becuase it goes with the long term eqilibrium of country's current account.

If the dutch disesase is not neutralised, they wil give good return and be advantageous in the short run to all the consumers because they buy tradable goods cheaper than the exchange rate prevailing in the equilibrium.