Dutch Disease

Dutch Disease refers to the adverse impact of a sudden discovery of natural resources on the national economy via the appreciation of the real exchange rate and the subsequent worsening of export competitiveness.If natural resources such as crude oil and gas are found and extracted and if the world price of them is rising, then export revenues will increase and there will be increased capital investment into that sector. But the risk is that there is a corresponding loss of investment into other industries such as manufacturing businesses. And the surge in export incomes can cause an appreciation of a country’s exchange rate which then makes other sectors such as car manufactures trying to export less price competitive in overseas markets. A worst-case scenario is when manufacturing industries in developing countries start to shrink well before it has reached middle-income status. This is known as premature de-industrialisation. This means that many developing nations are transitioning to becoming service economies without having had a proper experience of industrialisation and some of the gains from having a fast-growing manufacturing sector.

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