Dutch Disease, Resource Curse and Development*

*based on Teaching Material on “Dutch Disease, Resource Curse and 

Development”, UNCTAD, Virtual Institute, Geneva 2011 

Dutch Disease, Resource Curse 

and Development* 

Jan Priewe, professor of economics at HTW Berlin – University of 

Applied Sciences

Outline 

1) Introduction 

2) What are the Issues 

3) Standard Theories 

4) Debates on Standard Theories 

5) Empirical Evidence for DD and RC 

6) Coping with DD and RC : Policy Strategies 

7) Conclusions 

UNCTAD Division on Technology and Logistics - Knowledge Sharing, Training and Capacity Development Branch 

2

1. Introduction 

• Dutch Disease (DD): discovery of new natural 

resources or a price boom leads to real appreciation 

of the currency and hampers growth of 

manufacturing or other tradable sectors 

• Resource Curse (RC): long-lasting negative effect 

stemming from DD and its negative consequences: 

technical progress is subdued -> negative 

consequences on manufacturing 

• ample empirical evidence: most resource-rich 

countries grew less than resource-poor countries, 

over the long run; but great diversity between 

countries; few positive models 

• Institutions/governance/policies: can “strong” 

institutions and “good governance” or prudent 


3

2. What are the Issues 

• the “Economist” (26 November, 1977: 82-83) first coined 

the natural gas boom in the Netherlands in the 1970s as 

a “Dutch Disease” 

• This boom had caused a real appreciation which 

dampened manufactured exports and GDP growth. The 

new boom sector crowded out export-oriented industries. 

• Adam Smith (and others) had suspected that rentier 

economies, based on mineral resources rather than manmade 

goods cannot generate the wealth that capitalist 

nations are capable to produce 

• Many of the oil-rich countries experienced unambiguously 

less growth over many decades, despite occasionally 

mushrooming oil prices, than other developing or OECD 

countries. 

• DD in the long run: natural resource curse (RC) rather 

than a blessing, since technical progress, linked to 


4

Focus on Institutions and “Good 

Governance” 

• Botswana, Norway and Indonesia are often 

considered as positive models, but a closer look 

shows that hey are rather special cases 

• empirical evidence pro or contra seems to be 

enigmatic 

• recently the initial focus on exchange rates was 

widened or even replaced towards “good 

governance” and “policies” 

• recently many natural resources have been 

discovered mainly in Africa and Latin America 

• if it were mainly a matter of institution building and 

application of proper policies, Africa might face a 

bright future and it is high time to discover blueprints 5 

UNCTAD Division on Technology and Logistics - Knowledge Sharing, Training and Capacity Development Branch

3. STANDARD THEORIES 


6

Dutch Disease: The Standard Model I 

• static model of Dutch Disease by Corden/Neary (1982) 

• Three representative commodities: traditional 

tradables, especially manufactured goods (M), nontradable 

sector, primarily services (S), boom sector (E), 

e.g. fossil energy; note: agricultural goods are in principle 

also tradables 

• Assumtpions I: small open economy: the world market 

prices for tradables and natural resources are given: real 

exchange rate = Y S /Y M (Y is output) 

• Assumptions II: (1) full employment (2) no spending for 

capital accumulation (3) international capital immobility so 

that saving of windfalls abroad is excluded (4) hence 

capital account and current account are in balance (5) 

inflation is excluded (only a one-time price increase in 

non-tradables) (6) no money (Barter economy) and no 

nominal exchange rate, hence no monetary and 

exchange rate policy (7) no interest rate (8) no 


7

Dutch Disease: The Standard Model II 

Figure 1: Effect of the boom on the 

labour market 

Source: Corden/Neary 

(1982: 828). 

Before the boom: total labour 

supply O s -O t ; wage is w 0 ; 

L T and L S are labour 

demand for tradables and 

non-tradables; equilibrium 

in A 

Effects of resource boom: 

1) resource movement effect: 

• direct deindustrialisation A 

→ B 

• labour demand in the boom 

sector crowds out 

employment in other 

sectors; L T shifts to L‟ T 

2) spending effect B → G 

Indirect deindustrialisation: 

• more revenue → additional 

8 

spending and labour 


Dutch Disease: The Standard Model III 

Figure 2: Effects of the boom on 

the commodity market 

Source: Corden/Neary (1982: 

829) 

Fig. 2 shows a productionpossibility-frontier-curve: 

• initially, before the boom, curve 

T-S. The highest indifference 

curve can be reached at a. The 

tangent at a is the real 

exchange rate. 

• The resource boom shifts the 

curve to T„-S. 

• If there were no exchange rate 

change, b would be the new 

equilibrium. 

• But following the traditional 

consumption pattern O-n, point 

c would be reached, i.e. much 

more spending for S. 

9 

• Since non-tradables have 


Dutch Disease: The Standard Model IV 

• Standard Model does not assert that resource boom 

makes country poor – but real appreciation occurs 

more imports of tradables crowding out of 

domestic tradables (manfactures and/or agricultural 

goods) enhanced production of non-tradables 

• Does not look at resource price drops or exhaustion 

of resources 

• If resource movement effect is small (extraction of 

natural resources is capital intensive), spending 

effect predominates 


10

Resource Curse I 

• Sachs/Warner (1995) : empirical research, and 

drawing on endogenous growth theory 

• evidence from cross country studies shows that 

natural resource-rich countries have experienced 

less long-term growth rates than resource poor 

countries 

• the price level in “rentier economies” (big share of 

income are resource rents) is in general higher than 

in resource poor economies 

• resource-rich countries suffered from lower growth of 

manufacture exports 

• Manufacturing is main carrier of technical progress 

(human capital, R & D) 11 


Resource Curse II 

• higher domestic prices lead to reduced 

competitiveness of manufacturing 

• Engines for growth: Learning-by-doing effects, spilling 

over to other firms and industries, and increasing 

returns to scale 

• even if DD effect is only temporary, temporarily 

reduced knowledge accumulation can have a lasting 

effect (path dependence). From this angle, it is 

predominantly reduced human capital accumulation 

that hampers industrialization, continuous upgrading 

and diversification of industries. 

• high volatility of mineral and energy commodities and 

related uncertainties, 12 


Resource Curse III 

Figure 3: Growth and natural resource abundance 1970-1989 


13

Resource Curse IV 

Figure 4: Natural resource dependence and exports of manufactures (1970-89) 


14

4. DEBATES ON STANDARD 

THEORIES: LIMITATIONS, 

SHORTCOMINGS, CRITICISMS 


15

Limitations, Shortcomings, Criticisms: DD 

• Although standard model captures correctly the key problem 

of resource booms, it suffers from too strong assumptions 

which obfuscate reality 

• To use the model for empirical analysis, money and 

currencies must be included 

• Transposing the basic features of the model from a barter 

economy to a monetary economy opens the perspective to 

mitigate or cure the disease with macroeconomic, especially 

exchange rate policy 

• Inflation, monetary and exchange rate policy should be 

included 

• … and also international capital mobility incl. saving the 

windfalls abroad 

• DD and RC can be understood in a Ricardian perspective: 

natural resources become new comparative advantage that 

crowds out other traditional sectors 


16

Limitations, Shortcomings, Criticisms: RC 

• Windfall boom phases can increase the wealth of 

resource-rich countries considerably – booms don‟t look 

like disease or a curse … but development of 

employment and man-made wealth outside the boom 

sector is indeed hindered 

• Strong inflation due to spending effect is biggest risk 

which is not reflected in standard model 

• Other deficiency of the model: income distribution not 

addressed; rentier economies are mostly not “normal” 

market economies – strong financial role of state which 

receives big parts of the rents 

• The long-run disease is difficult to diagnose with regard 

to the initial causes and the subsequent additional 

causes that eventually lead to vicious circles which 

corroborate the disease. 

• Governments and central banks often try to mitigate too 

strong appreciations or depreciations - the more 

successful the attenuation is, the less visible is the 


17

5. EMPIRICAL EVIDENCE FOR DD 

AND RC 


18

Empirical Evidence for DD and RC I 

Figure 5: Crude oil prices 1970-2009 

Source : http ://www.wtrg.com/oil_graphs/oilprice1947.gif 


19

index metals & minerals, 1970=100 

US$/barrel, crude oil (Brent) 

Empirical Evidence for DD and RC II 

Figure 6: Prices of mineral commodities and crude oil 

Prices of mineral commodities* (index, 1970=100) and crude oil 

(US$/barrel), 1982-2010 

800 

700 

160 

140 

600 

120 

500 

100 

400 

80 

300 

60 

200 

40 

100 

20 

0 

0 

Q2 1982 

Q4 1983 

Q2 1985 

Q4 1986 

Q2 1988 

Q4 1989 

Q2 1991 

Q4 1992 

Q2 1994 

Q4 1995 

Q2 1997 

Q4 1998 

Q2 2000 

Q4 2001 

Q2 2003 

Q4 2004 

Q2 2006 

Q4 2007 

Q2 2009 

index metals & minerals, lhs 

crude oil, brent, US$/barrel, rhs 

*Gold, silver, aluminum, zinc, copper, potash, lead, iron 

Source: Datastream, own calculations 

20 


Empirical evidence III 

• Oil boom in the 1970s was followed by a long slump 

until end of 1990s, but often appreciation of REER was 

not offset by subsequent depreciation 

• In some countries spending windfalls led to high 

inflation which triggered depreciation of the exchange 

rate 

• During the oil boom 1998-2007 most countries 

experienced real appreciation - or avoided this through 

saving windfalls abroad (central bank reserves, 

sovereign wealth funds etc.) 

• In contrast to standard model, model countries built up 

big current account surpluses during booms mirror 

image of saving windfalls abroad 

• Low long-term growth in oil-rich countries, but wealth 

21 

accumulation abroad in several countries 


Empirical Evidence for DD and RC IV 

Algeria 1960-2010 1.10 1998-2010 1.99 

Table 1: 

GDP growth 

rate per 

capita p.a. in 

OPEC 

countries, 

per cent 

Angola 1985-2010 2.29 1998-2010 6.59 

Ecuador 1960-2010 0.70 1998-2010 2.29 

Iran, Islamic Rep. (1965-2009) 1965-2009 0.88 1998-2009 3.23 

Iraq 1997-2010 0.32 1998-2010 -1.87 

Libya 1999-2009 2.11 1999-2009 2.11 

Kuwait 1995-2007 1.60 1998-2008 2.45 

Nigeria 1960-2010 1.29 1998-2010 3.38 

Qatar 2000-2009 3.27 2000-2009 3.27 

Saudi Arabia 1968-2009 0.84 1998-2009 0.64 

United Arab Emirates 1973-2009 -1.80 1998-2009 1.24 

Venezuela, RB 1960-2010 0.00 1998-2010 0.49 

OPEC average* 1.05 2.15 

OECD-countries 1970-2010 2.01 1998-2010 1.24 

sub-Sahara Africa (developing only) 1960-2010 0.76 1998-2010 1.82 

South Asia 1960-2010 3.20 1998-2010 5.19 

Least developed countries 1981-2010 1.48 1998-2010 3.43 

Latin America & Caribbean (developing only) 1960-2010 1.71 1998-2010 1.84 

East Asia & Pacific (developing only) 1960-2010 5.52 1998-2010 7.81 

*per annum in the periods indicated 

Source: World Bank, WDI, own calculations 


22

% of GDP 

Empirical Evidence for DD and RC V 

Figure 7: Total Natural Resource Rents 

Total natural resource rents* in % of GDP 

Algeria 

120 

Angola 

100 

peak of average 

resource rent of 19 

countries 2005: 48% 

Iraq 

Azerbaijan 

Bolivia 

Ecuador 

80 

Iraq 

Kuwait 

60 

40 

Angola 

Nigeria 

Libya 

Norway 

Russian Federation 

Saudi Arabia 

United Arab Emirates 

20 

Venezuela, RB 

Indonesia 

0 

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 

Source: WB, WDI 2011 

Norway 

*sum of oil rents, natural gas rents, coal rents (hard and soft), mineral rents, and forest rents 

Mexico 

Nigeria 

OECD members 


23

% of GDP 

Empirical Evidence for DD and RC VI 

Figure 8: Manufacturing, value added, % of GDP 

Manufacturing, value added, % of GDP 

Angola 

35 

Algeria 

Venezuela, RB 

30 

Indonesia 

Ecuador 


25 

average China, 

India, Brazil 

Azerbaijan 

Saudi Arabia 

20 

Venezuela 


Kuwait 

15 

Libya 

Bolivia 

10 

Norway 

Iraq 

5 

0 

1990 

1991 

1992 

1993 

1994 

1995 

1996 

1997 

1998 

1999 

Iraq 

2000 

2001 

2002 

2003 

2004 

Nigeria 

2005 

2006 

2007 

2008 

2009 

Angola 

Source: World Bank, World Development Indicators, own calculations 


Norway 

Indonesia 

United Arab Emirates 

Nigeria 

Manufacturing, value added 

(% of GDP) average China, 

Brazil, India; SA 

Reihe8 

24

Nigeria, Iran, Algeria, Sambia, Saudi-Arabia 

Empirical Evidence for DD and RC VII 

Fig. 9: Real effective exchange rates 

Real effective exchange rates (index 2005 = 100) 

700 

200 

Algeria (lhs) 

600 

Nigeria (lhs) 

Venezuela 

180 

Iran (lhs) 

Iran (lhs) 

160 

Nigeria (lhs) 

500 

140 

Saudi Arabia (rhs) 

400 

Norway 

120 

100 

Zambia (lhs) 

Chile (rhs) 

300 

200 

100 

0 

1980 

1981 

1982 

Saudi-Arabia 

Zambia 

1983 

1984 

1985 

1986 

1987 

1988 

1989 

Algeria 

(lhs) 

Russian 

Federation 

1990 

1991 

1992 

1993 

1994 

1995 

1996 

1997 

1998 

1999 

2000 

2001 

2002 

2003 

2004 

2005 

2006 

2007 

2008 

2009 


80 

60 

40 

20 

0 

Ecuador (rhs) 

Norway (rhs) 

South Africa (rhs) 

Venezuela (rhs) 


(rhs) 

25

Empirical Evidence for DD and RC VIII 

• The magnitude of the resource rent, as calculated by the World Bank, 

was in 2005 on average 48 per cent of GDP 

• most OPEC countries have remained mono exporters of oil and/or gas 

• Contrary to standard DD theory, in the period between 1970 and 2009 

growth of manufacturing output was quite diverse, but often starting 

from a very low level 

• There is a broad spectrum of manufacturing (value added) as a share 

of GDP, in general much lower than in emerging economies 

• The majority of 17 energy-rich countries analysed achieved fairly low 

inflation over the 50 years, but some fell in high or even hyperinflation 

• In boom periods, there is a trend to real appreciation, but in some 

countries the exchange rate is pegged to the US-$ (e.g. several Middle 

East countries) 

• 1n the 1980s and until 1999, many commodity exporters incurred high 

external debt using resources as collateral to weather the oil slump, 

and often fell in over-indebtedness 26 


Empirical evidence IX: External Saving 

• Gelb & Associates (1988) analyzed the first two oil price booms of 

the 1970s for a sample of six developing countries 

• They concluded that with hindsight the governments should have 

saved more abroad and spent less at home recycling of petrodollars 

via capital markets 

• During the recent oil and commodity boom this policy had been 

implemented to a higher degree than formerly 

• Saving abroad is difficult for poor resource-rich and populous 

countries (e.g. Angola, Nigeria) – they desire more consumption 

and investment immediately 

• Especially in most OPEC countries and in Norway, external saving 

and active exchange rate management were cornerstones of oil 

management. 

• In contrast, Angola, Venezuela and, to a lesser extent, Nigeria 

opted for the spending strategy, often with inflationary results 

• Norway, often seen as a model, invests oil/gas windfalls abroad as 

a pension fund and uses only the returns domestically, besides 


27

Indonesia – Successfully Escaping Dutch 

Disease and Resource Curse 

• The economy managed to grow quickly and achieved a 

thorough diversification of its economy towards robust and 

diversified industrialization 

• It seems that the early exhaustion of oil reserves triggered 

diversification of the economy (peak in 1977), but gas extraction 

was partly a substitute 

• Windfalls crowded out agricultural employment, not 

manufacturing, triggering strong productivity increases in 

agriculture 

• Overall, Indonesia managed to avoid debt-led industrialisation 

with windfall inflows that were – despite high corruption – 

successfully used for the modernisation of agriculture and for 

fostering manufacturing, while keeping the real exchange rate in 

the long run fairly stable, despite longer periods of overvaluation 

• Perhaps it is better to have some natural resources, but not too 


28

Nigeria – Dutch disease, Resource Curse 

and Poor Institutions 

• All characteristics of DD and RC can be seen in Nigeria at an 

extreme extent 

• Nigeria is and has been since the 1960s heavily oil-dependent 

• Manufacturing is still almost negligible 

• Use of windfalls for predominantly unproductive public investment 

• real exchange rate roller-coaster, severe inflation could not be 

avoided 

• The oil slumps after the booms in the 1970s were countered with 

heavy external borrowing (up to 193 per cent of GDP in 1993) 

• Absolute poverty increased from 1970 to 2000 from 36 to 70 per 

cent of the population. 

• Some authors blame “bad institutions” and corruption as the main 

cause of the Nigerian malaise 

• Note: a rentier economy with high profits from oil and gas windfalls, 

gives the government enormous power; this transforms the 29 


Venezuela – no growth despite oilabundance 

Figure 10: Venezuela: GDP per capita 1980-2010 

Source: World Bank 2011, World Development Indicators, own calculations 

30 


Venezuela – no growth despite oilabundance 

• Fairly high income p.c. level in Venezuela since long 

in PPP, but hardly any trend growth since 1980 

• Strong increase of average incomes in current US-$, 

but this view is deceptive: real incomes hardly rose 

• Nominal exchange rate is controlled, but inflation is 

not real appreciation 

• Spending effect dominates: much of windfalls is 

spent locally for consumption, in recent years in a 

pro-poor manner; Gini coefficient fell 

• Industrial sector is kept alive, often highly subsidized 

and inefficient 

• Venezuela suffers both DD and RC 


31

Botswana – a very special case 

Botswana – a success model: 

• Botswana (only 2 Mio. inhabitants) benefits from wealth 

in diamonds remarkable continuous GDP growth with 

fairly low inflation 

• Economy strongly dependent on diamonds exports 

• In contrast to oil – steady increase of world market 

diamonds prices since five decades permanent boom 

• Very little diversification of industry – manufacturing 

neglegible, but strong civil service and parastatal sector 

• Increasing inequality of income distribution 

• Real exchange rate strongly managed by central bank 


32

US$, p.c. 

index, 2005 = 100 

Norway – another special case 

100.000 

90.000 

80.000 

70.000 

60.000 

50.000 

40.000 

30.000 

20.000 

10.000 

0 

1970 

1972 

REER 

(downward = 

appreciation), 

rhs 

GDP p.c., constant US$, 

lhs 

Source: World Bank 2011, World 

Development Indicators, own calculations 

Norway: key indicators 

GDP p.c., PPP in 

constant US$, lhs 

1974 

1976 

1978 

1980 

1982 

1984 

1986 

1988 

1990 

1992 

nominal 

exchange rate 

(downward = 

appreciation), 

rhs 

GDP p.c., current US$, lhs 

1994 

1996 

1998 

2000 

2002 

current account 

balance, % of GDP, 

rhs 

2004 

2006 

2008 

33 


2010 

160 

140 

120 

100 

80 

60 

40 

20 

0 

-20

Norway – another special case 

• Oil and gas resources discovered in early 1970s, as a 

highly developed small country (5 mill. inhabitants) 

• Natural resources state-owned 

• Windfalls saved in a national fund abroad, used as a 

pension fund, amounting to 120 % of GDP 

• returns from the capital stock transferred to Norway 

• Social security contributions and taxes < average 

OECD countries indirectly consumption of windfalls 

• Low inflation, managed exchange rates 

• Low long-term per capita growth 

• High domestic prices, wages and cost level 

• Diversificcation of manufacturing unsuccessful 

• Industry centered on construction and maritime 

industries 

• 85,000 US-$ p.c., but in PPP 55,000 US-$ (2009/10) 

• Gini-cofficient as low as 0.258 

• Similar to Middle East, but equal distribution 


34

6. COPING WITH DD AND RC : 

SEARCHING FOR POLICY 

STRATEGIES 


35

Extraction Policy and use of resource rents 

• How much natural resource should be extracted How to 

use windfalls 

• Hotelling‘s Rule: extraction is conditional on maximization 

of rents - achieved if the long-term interest rate equals the 

expected net price increase of the natural resource. In 

reality, imperfect competition and high uncertainty 

predominate. Rule not really applicable under real world 

conditions 

• Hartwick-Rule stipulates that the loss of exhaustive 

natural resources by extraction can only be offset by using 

the resource rents for the generation of produced capital. 

Only the yields from this produced wealth should be be 

consumed. Rule for environmental sustainability 

• Neither the Hotelling-Rule nor the Hartwick-Rule deal 

directly with DD 

• Yet, containing DD is easier if the speed of extraction of 36 


Alternative Strategies for Resource-rich 

Countries 


37

What is the best strategy 

• Inflationary spending and resource movement effects 

should be mitigated 

• In poor countries use of windfalls for productive investment 

advisable - only if non-inflationary 

• When windfalls are huge, saving abroad is MUST to avoid 

inflation 

• Lower current account deficit, repay external debt 

• Use of rents for industrial and agricultural policy, incl. 

productive infrastructure and human capital formation 

• Monetary policy should target stabilization of REER or 

mitigating swings 

• Use mainly fiscal policy for keeping price stability 

• Save part of windfalls abroad, use for counter-cyclical 

policy to bridge slumps 

• Mind pro-rich distribution of rents 

38 


7. CONCLUSION AND OUTLOOK 


39

Conclusion and Outlook I 

• Windfalls tend to trigger real currency appreciation, 

depreciations in slumps 

• Avoid inflationary use of the windfalls, cope with volatility 

of resource prices 

• DD can evolve into an enduring RC if the core sector of 

technical progress and growth, manufacturing, is 

continuously suppressed 

• The terms “disease” and “curse” are a bit misleading, as 

wealth increases in booms if not offset in slumps or lost 

by inflation or de-industrialization 

• Bad “institutions” and “bad governance” are not the 

cause of DD and RC, but they exacerbate the problems 

• Among developing countries with strong resource 

dependence, the only model for more blessing than 

curse was Indonesia but it is a special case 40 


Conclusion and Outlook II 

• There is no quick and easy medicine for DD and RC 

• A new overwhelmingly strong comparative 

advantage squeezes more or less the comparatively 

disadvantageous sectors 

• A mix of saving abroad and spending for investment 

domestically is advisable, embedded in macro 

policies which stabilize the real exchange rate at a 

level competitive for non-resource tradables, 

especially manufactures 

• More generally, resource-rich economies are, more 

or less, rentier economies which differ from normal 

market economies. DD and RC concepts should be 

embedded in the political economy of rentier 

economies whose predominant income are rents 

from natural resources. 


41

Literature 

• Corden, W.M. and Neary, J.P. (1982). “Booming Sector and De- 

Industrialisation in a Small Open Economy”. The Economic Journal, 92 

(December 1982): 825-848. 

• As a first quick introduction: Ebrahim-zadeh, Ch., 2003: Dutch Disease: 

Too much wealth managed unwisely. In: Finance & Development, Vol. 

40, March, No. 1 

https://www.imf.org/external/pubs/ft/fandd/2003/03/ebra.htm 

• Gelb, A. and Associates (1988). Oil Windfalls: Blessing or Curse 

Published for the World Bank. Oxford, Oxford University Press. 

• Humphreys, M., Sachs, J. and Stiglitz, J.E., Eds. (2007). Escaping the 

Resource Curse. New York, Columbia University Press. 

• Sachs, J.D., and Warner, A.M. (2001). “The Curse of Natural 

Resources”. European Economic Review, 45(4-6): 827-838. 

• UNCTAD (2008): The Least Developed Countries Report 2009: The 

state and developing governance. Background Paper No. 4 (April 2008) 

by Jourdan, P. (2008): Challenges of LDC Resource-Based Development. 

Geneva. 


42

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