Dutch Disease
Dutch disease is the squeeze on tradable non-resource sectors when a resource boom or capital inflow appreciates the real exchange rate and pulls factors into the booming sector.
Definition
Named after the 1960s Netherlands gas boom. A spending effect (higher domestic demand) plus a resource-movement effect (labor/capital leave manufacturing) appreciate the real FX and hollow out other tradables. The ‘disease’ is the post-boom hangover, not the boom itself.
Why it matters
Commodity EM and petrostates live this. So do countries that get a sudden capital-inflow boom. The FX and the current account are the thermometers.
Case
Australia and Canada in the 2000s China boom, Nigeria and Russia on oil spikes, and some Gulf economies: manufacturing share shrinks while the currency and construction boom.
How to read it
Split the terms-of-trade shock from policy (fiscal pro-cyclicality, FX intervention). A sovereign wealth fund is an attempt to sterilize the spending effect.
Key papers
Landmark references with real publisher or arXiv links — not token-overlap noise.
- Booming Sector and De-Industrialisation in a Small Open EconomyCorden, Neary · 1982 · Economic JournalThe workhorse Dutch-disease model.