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Explanations

The Dutch Disease

Geoff Riley

9th October 2012

The classic model depicting Dutch Disease was created by two economists (W. Max Corden and J. Peter Neary) in 1982. In this model there in one non-traded goods sector (services etc.) and two traded goods sectors, one is booming and the other is lagging. The booming sector usually arises from the exploitation of natural gas and oil but has also been referred to other natural resources such as minerals (cooper, gold etc.). The lagging sector is almost always the manufacturing sector.

This resource boom impacts the lagging sector of the economy in two ways. Firstly, it switches labour away from the manufacturing sector towards exploiting the natural resources now at its disposal. While this helps to increase the short-term revenue gained from these resources it lowers the productivity of the manufacturing sector of the economy. This has major impacts in the long-run when the resources are all used up as now the manufacturing sector of the economy is extremely weak and unproductive and so the economy has nothing to fall back on. (The shift i

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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