ECO 4117

1

• Serge Coulombe
• Department of Economics

• ECO 4117
• The Resource Curse and the Dutch Disease

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The Resource Curse
3
(RS)
!!BOOM!!
!!BOOM!!
Spending effect
Increased income from RS is spent on the NT
sector by private/public sector
With the real appreciation, resources are
transferred from the MS and RS to the NT sector
? First deindustrialization
(NT)
(MS)
? Demand for NT ? NT price
Real appreciation
Real exchange rate is the ratio between the price
of NT and the price of traded goods

• RS and MS are price taker in world markets

4
Resource sector (SR)
!!BOOM!!
!!BOOM!!
? Demand for labour
Resource movement effect
? second deindustrialization
? First deindustrialization
Non-Tradable (NT)
Manufacturing sector (MS)

• Boom in RS decreases the competitiveness of the
  manufacturing sector

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The Dutch Disease

• From an article in The Economist on the Dutch
  economy following gas discovery in the late 1960s
• Modelled by Corden and Neary (1982)
• DD and variants are the most common explanations
  of the resource curse.
• Capital, labour, and land are transferred from
  the manufacturing sector to the resource,
  service, and construction sectors
• The resource boom decreases the competitiveness
  of export-oriented manufacturing industries

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In Less developed countries

• Shrinking of the manufacturing sector is not by
  itself a disease. Howerver as Krugman 1987 put
  it
• The Dutch thing becomes also a disease in
  countries with poor democratic institutions
  (examples to be found in the Middle East and
  Africa)
• Vast majority of the population kept uneducated,
  corrupted institutions, rent seeking by the
  ruling minority that controls both government and
  resource industries.
• According to Greenspan (2006), DD is the biggest
  threat to the industrial development of Russia.

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In rich countries

• Few evidence of DD in countries that already have
  good democratic institutions (Norway, Canada,
  Australia).
• In Norway for example, 80 of the rent from oil
  extraction is captured by the central government
  and saved in the Norway petroleum fund.
• Case study however of Norway versus Denmark and
  Sweden illustrates that it is more difficult in
  Norway to have a diversified export base.