Dutch disease occurs when a country’s economy is damaged after an increase in income, often due to the discovery of natural resources. This leads to a lack of competitiveness in other markets and reliance on imports, causing the economy to suffer.
Dutch disease is a term used to describe a condition in which a country’s economy is damaged after its income increases. This term takes its name from an accident in the Netherlands in the 1960s in which large quantities of natural gas were discovered. Dutch disease eventually leads to a lack of competitiveness in other markets and the country begins to rely on imports.
In many cases, Dutch disease is used to describe a situation where a large amount of natural resources are discovered in a country. While it is commonly used in regards to natural resources, it can apply to any situation where a country suddenly becomes richer. Due to the new wealth, the country begins to suffer in other areas.
One of the first things that will happen during this situation is that the residents of a country will get richer. In the example of finding natural gas or oil, many landowners will end up with increased income as a result of the discovery. This means that people who were previously involved in other trades will now focus solely on the endeavor that brings them the most money. When this happens, many industries that are not related to primary industry begin to suffer.
When many people suddenly have more money, this can drive available workers from needed industries. For example, people who previously worked in manufacturing plants will stop pursuing other jobs. When this happens, it negatively affects the factory’s ability to compete with the rest of the market. The country will soon find that its exports are no longer competitive.
The second part of Dutch disease notes that the country is more dependent on imports. Areas that countries once could rely on are no longer viable. In these areas, the country can no longer produce the necessary resources at competitive prices. This results in the country having to buy certain things from other countries.
At this point, the country is relying on imports just to get by. Due to over-dependence on imports, the country’s economy begins to suffer. This can adversely affect the fluctuating exchange rate between two currencies. Due to Dutch disease, the country is in a situation that is actually worse than before the newfound wealth was achieved by its residents.
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