Dutch Disease

Origin and core idea

In 1959 the Netherlands discovered the Groningen field, then Europe's largest natural gas reserve, and gas exports surged through the 1960s and 1970s. Yet as the guilder strengthened and wages rose, manufacturing employment fell and unemployment climbed. In 1977 The Economist dubbed this the Dutch disease. The key insight is that a boom in one sector is not unambiguously good for the whole economy: by changing the structure of tradable production it can crowd out other exporters. The idea builds on the dependent-economy models of Salter (1959) and Swan (1960), in which the relative price of tradables and nontradables, the real exchange rate, governs internal and external balance.

The Corden–Neary model

Max Corden and Peter Neary (1982) formalized the disease by dividing the economy into a booming sector (such as oil and gas), a lagging tradable sector (such as manufacturing) and a nontradable sector (such as services). The resource movement effect is direct deindustrialization: high returns in the booming sector pull labor and capital out of manufacturing. The spending effect arises because higher incomes raise demand for nontradables, bidding up their prices, which is equivalent to a real exchange rate appreciation. Since tradable prices are set on world markets, manufacturers are squeezed twice, by rising costs and by lost price competitiveness. Corden (1984) consolidated the framework, noting that under fixed exchange rates the same outcome arrives through domestic inflation. Van Wijnbergen (1984) and Krugman (1987) argued that if manufacturing involves learning by doing, even a temporary contraction can cause lasting productivity losses.

Evidence and policy debate

Sachs and Warner (2001) reported that countries with high resource export shares grew more slowly, the resource curse, and identified Dutch disease as a key channel. Ismail (2010) found that oil price increases reduce manufacturing output in oil exporters, and Harding and Venables (2016) estimated that each dollar of resource exports lowers non-resource exports by roughly 70 cents. Rajan and Subramanian (2011) showed that large aid inflows can slow export manufacturing growth through a similar channel. By contrast, countries such as Norway, which save resource revenue in a sovereign wealth fund invested abroad and raise domestic spending gradually, are widely seen as having softened the shock (van der Ploeg, 2011). The concept is now applied not only to resource-rich economies but also to remittances, tourism booms and large capital inflows.

FAQ

What is Dutch disease in simple terms?

When resource exports bring in a flood of money, the currency and wages rise, and other export industries, especially manufacturing, lose competitiveness and shrink.

Is Dutch disease the same as the resource curse?

The resource curse refers broadly to resource-rich countries growing more slowly; Dutch disease is one economic channel behind it, working through the exchange rate and industrial structure.

Sources reviewed: 2026-10-26

References

1. The Economist. (1977, November 26). The Dutch disease. The Economist, 82–83.
2. Corden, W. M., & Neary, J. P. (1982). Booming sector and de-industrialisation in a small open economy. Economic Journal, 92(368), 825–848.
3. Corden, W. M. (1984). Booming sector and Dutch disease economics: Survey and consolidation. Oxford Economic Papers, 36(3), 359–380.
4. Salter, W. E. G. (1959). Internal and external balance: The role of price and expenditure effects. Economic Record, 35(71), 226–238.
5. Swan, T. W. (1960). Economic control in a dependent economy. Economic Record, 36(73), 51–66.
6. van Wijnbergen, S. (1984). The 'Dutch disease': A disease after all? Economic Journal, 94(373), 41–55.
7. Krugman, P. (1987). The narrow moving band, the Dutch disease, and the competitive consequences of Mrs. Thatcher. Journal of Development Economics, 27(1–2), 41–55.
8. Sachs, J. D., & Warner, A. M. (2001). The curse of natural resources. European Economic Review, 45(4–6), 827–838.
9. Rajan, R. G., & Subramanian, A. (2011). Aid, Dutch disease, and manufacturing growth. Journal of Development Economics, 94(1), 106–118.
10. Ismail, K. (2010). The structural manifestation of the 'Dutch disease': The case of oil exporting countries. IMF Working Paper 10/103. Washington, DC: International Monetary Fund.
11. van der Ploeg, F. (2011). Natural resources: Curse or blessing? Journal of Economic Literature, 49(2), 366–420.
12. Harding, T., & Venables, A. J. (2016). The implications of natural resource exports for nonresource trade. IMF Economic Review, 64(2), 268–302.
13. Gylfason, T., Herbertsson, T. T., & Zoega, G. (1999). A mixed blessing: Natural resources and economic growth. Macroeconomic Dynamics, 3(2), 204–225.