Dutch disease

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This article talks about the Dutch Disease and how to combat it.

What is Dutch Disease?

Dutch Disease in economics refers to a phenomenon wherein a country witnesses uneven growth across sectors due to the discovery of natural resources, especially large oil reserves. 

According to the concept, when a country discovers natural resources and starts exporting them to the rest of the world, it causes the exchange rate of the currency to appreciate significantly and this, in turn, discourages the exports from other sectors while encouraging the import of cheaper alternatives.

Who coined the term Dutch Disease?

The term ‘Dutch disease’ was first coined by The Economist in 1977 to describe the decline of the manufacturing industry in the Netherlands.

How to combat Dutch Disease?

Role of Fiscal Policy: According to the researchers, the role of fiscal policy is important to control the boom following the discovery of natural resources. Rising income due to the export of natural resources should be adjusted with cautious spending on public welfare.

Promote public spending policies: Public spending such as concentrating on imports of tradeables rather than non-tradables would help slow the impact of the Dutch disease. Private spending in order to improve the productivity of private firms would also help reduce the impact.

Role of Monetary Policy: With the discovery of natural resources, the country sees a huge inflow of money, especially foreign currency. The export of natural resources tends to affect the equilibrium in the money and exchange rate markets. The Dutch disease can be prevented if the central bank raises the banking system reserve’s requirement, which decreases domestic credit.

Source: The post is based on the article Dutch diseasepublished in The Hindu on 20th June 2022.

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