Dutch Disease: A Global Phenomenon That Can Harm a Country's Economy

Dutch Disease is a term coined by British journalist The Economist in 1977 to describe a paradox that occurs when there is a discovery of substantial natural resource reserves in a country, yet the discovery and exploitation of these resources detrimentally affects the overall economy of the country. The phrase was inspired by the economic and political fallouts from the Netherlands' decision to begin exploiting its large natural gas reserves in the 1960s.

When a country discovers a reserve of natural resources such as oil, the influx of foreign investment to exploit the resource can cause an increase in the value of the local currency. This could be in part due to the increase in wealth and subsequent influx of money, but it can also be due to foreign investors wanting to cash in on the resources without investing in other important industries. In an open economy, foreign influence over the currency is often significant.

The increased value of the local currency has a few effects on the economy. The first is that it makes exports from the country cheaper, meaning that it can be more efficient to import products rather than produce local versions. This causes job losses in the country and a decrease in export revenue. The second effect is that it can make foreign goods relatively more expensive, leading to higher consumer prices and a loss of purchasing power. Finally, it can induce poor government spending decisions, such as spending on unproductive investments or social welfare programs.

Ultimately, the country is left in a precarious place. It has a valuable natural resource that is generating large amounts of revenue, yet it is not adequately diversified to take advantage of receiving those funds in a productive manner, leading to a decrease in exports and a lack of jobs available. This is what Dutch Disease demonstrates.

The phenomenon of Dutch Disease has been documented in various countries around the world, from Venezuela to Nigeria to the United States. It is also a well-known effect of resource booms that can have devastating consequences when not approached with caution and intelligent economic management. Nations should be aware of the possibility of Dutch Disease occurring when resources are exploited and respond accordingly with economic policies that maintain economic stability and take advantage of the resources in a sustainable manner.