How Did The Dutch Disease Affect The Economy

1. Dutch Disease: Impact on Economy
Due to advancement of exploration techniques in the 20th century there have been many discoveries of huge reserves of natural resources. However, what is supposed to be a blessing for the economy does not always appear to be the case when it comes to managing the revenues the country generates by using its national wealth. The Dutch Disease has attacked both developed and developing nations and have impacted their economies in negative way, so the policymakers have been looking for effective ways of curing it. While some countries have been struggling to manage their economic situation, others seem to find the right measures to prevent the problem. So the key question is how an economy suffering from this
The country policymakers tend to concentrate their attention on the extraction industry and exports of the resource since it generates easy money. Therefore, the majority of domestic and foreign investments go into the income-generating field for getting advanced equipment, educating people and subsequently generating more revenues. Lacking state support other sectors of national economy, like agriculture, automotive industry, food processing and other manufacturing industries start falling behind. The higher wages in the booming sector result in extra spending on non-traded goods (services) raising the prices and leading to the development of the sector. This is known as the ‘spending effect’ (Corden and Neary, 1982). The growth of the service sector attracts employees from manufacturing industries experiencing decline. As a result, people quit the loosing fields and move to the flourishing sectors, such as petroleum industry and the service sector. This effect is known as ‘resource movement effect’ (Corden and Neary, 1982). The raise of prices, i.e. currency appreciation results in further aggravation in competitiveness of
This approach allows reducing currency appreciation by limiting capital inflow. However, in case of Russia having currency reserves did not exempt it from huge economic problems during the crisis. As the Russian government does not have much of other income sources, it started spending the accumulated reserves at a catastrophic rate (Economy Watch, 2014). Based on this example we could say that this measure only will not be of much help in case of fall in prices on the main exported