Dutch Disease

Definition

The harm to a country's wider economy when a boom in one sector (typically natural-resource exports or a large inflow of foreign money) pushes up the exchange rate and makes the country's other tradable industries, especially manufacturing, uncompetitive.

Key points

• The name comes from the Netherlands in the 1960s, where a natural-gas export boom hurt the rest of Dutch manufacturing.
• Mechanism: large export earnings or capital inflows raise demand for the local currency, the currency appreciates, and exports from other sectors become costly and uncompetitive abroad.
• It can also occur from heavy remittances or surges of foreign investment, not only from natural resources; this links to concept hot money.
• The result is a lopsided economy, over-reliant on the booming sector and with a weakened manufacturing base.
• Remedies discussed include sovereign wealth funds (parking earnings abroad) and managing the exchange rate; it connects to the "resource curse" idea.

Why it matters for CAPF

The definition (a resource or inflow boom appreciating the currency and crippling other exports) and the Netherlands origin are testable named-phenomenon facts.

Common confusion

Dutch disease is not a literal illness; it is the economic damage from currency appreciation triggered by a resource or capital boom, weakening other tradable sectors, especially manufacturing.

Parent note

external sector trade and bop