Dutch disease

The term was coined in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of the large Groningen natural gas field in 1959.

[2] The classic economic model describing Dutch disease was developed by the economists W. Max Corden and J. Peter Neary in 1982.

[8] There are three basic ways to reduce the threat of Dutch disease: (1) slowing the appreciation of the real exchange rate, (2) boosting the competitiveness of the adversely affected sectors, and (3) demographic adaptation.

In developing countries, this can be politically difficult as there is often pressure to spend the boom revenues immediately to alleviate poverty, but this ignores broader macroeconomic implications.

talks led by the United Nations Development Programme in Cambodia – International Oil and Gas Conference on fueling poverty reduction – point out the need for better education of state officials and energy CaDREs (Capacity Needs Diagnostics for Renewable Energies) linked to a sovereign wealth fund to avoid the resource curse (Paradox of plenty).

Imposing tariffs on imported goods will artificially reduce that sector's demand for foreign currency, leading to further appreciation of the real exchange rate.

An appreciation in the real exchange rate could be caused by other things such as productivity increases in the Balassa-Samuelson effect, changes in the terms of trade and large capital inflows.

However, evidence does exist suggesting that unexpected and very large oil and gas discoveries do cause the appreciation of the real exchange rate and the decline of the lagging sector across affected countries on average.