What is the 'Dutch Disease'

Dutch disease is an economics term that refers to the negative consequences arising from large increases in the value of a country's currency. It is primarily associated with a natural resource discovery but can result from any large influx of foreign currency into a country, including foreign direct investment, foreign aid or a substantial increase in natural resource prices.

BREAKING DOWN 'Dutch Disease'

As an economic phenomenon, Dutch disease has two main effects: a decrease in the price competitiveness for exports of the affected country's manufactured goods and an increase in the quantity of imports. Both result from a higher local currency. In the long run, these factors can contribute to higher unemployment due to manufacturing jobs being moved to lower-cost countries. The end result is nonresource industries are hurt by the increase in wealth generated by the resource-based industries.

Origin of the Term

The term "Dutch disease" was coined by The Economist magazine in 1977. The magazine was analyzing a crisis taking place in the Netherlands following discoveries of vast natural gas deposits in the North Sea in 1959. The newfound wealth and massive exports of oil caused the Dutch guilder to rise sharply, making exports of all nonoil products less competitive on the world market. Unemployment rose from 1.1% to 5.1%, and capital investment in the country dropped.

Dutch disease became widely used in economics to describe the paradoxical situation where seemingly good news, such as the discovery of large oil reserves, turns out to have a negative impact on a country's broader economy.

Examples of Dutch Disease

In the 1970s, the same economic condition occurred in Great Britain, when the price of oil quadrupled, and it became economically viable to drill for North Sea Oil off the coast of Scotland. By the late 1970s, Britain had become a net exporter of oil; it had previously been a net importer. The pound soared in value, but the country fell into recession when British workers demanded higher wages and exports became uncompetitive.

In 2014, economists in Canada reported that the increased influx of foreign capital related to the exploitation of the country's oil sands may have led to an overvalued currency and a decreased competitiveness in the manufacturing sector. At the same time, in Russia, the ruble had greatly appreciated for similar reasons.

In 2016, the price of oil dropped significantly, and both the Canadian dollar and the Russian ruble returned to lower levels, easing the concerns of Dutch disease in these countries.

RELATED TERMS
  1. Export

    An export represents goods produced in one country and shipped ...
  2. Terms of Trade - TOT

    Terms of trade (TOT) are the ratio between a country's export ...
  3. Net Exporter

    A net exporter is a country or territory whose value of exported ...
  4. Trade Deficit

    A trade deficit occurs a country's imports exceeds its exports. ...
  5. Foreign Investment

    Flows of capital from one nation to another in exchange for significant ...
  6. Import

    An import is a good or service brought into one country from ...
Related Articles
  1. Insights

    The Balance Of Trade

    The balance of trade is the difference between a country’s imports and exports. A trade deficit occurs when a country buys or imports more goods from other countries than it sells or exports. ...
  2. Investing

    Royal Dutch Shell Strategy Update

    Royal Dutch Shell held its twice a year strategy update and is well along in meeting goals set out in 2010.
  3. Trading

    Main Factors that Influence Exchange Rates

    The exchange rate is one of the most important determinants of a country's relative level of economic health and can impact your returns.
  4. Financial Advisor

    3 Signs the Russian Economy Is Recovering

    Understand what has caused the Russian economy to decline in the past 18 months. Learn about key factors that are helping it recover.
  5. Trading

    Weakest Currencies against the U.S. Dollar in 2015

    The U.S. dollar has been pummeling other currencies, largely due to falling global commodity prices. Here are the worst performing currencies of 2015.
  6. Investing

    Impact of Low Oil Prices on Oil Sellers and Buyers

    The impact of the fall in oil prices globally is nuanced due to the complex economies of some countries --some of which are both oil producers and buyers.
  7. Investing

    Who is Most Affected by Lower Oil Prices?

    With low oil prices affecting just about everyone, from citizens to corporations to entire nations, we look at who wins and who loses with the price drop.
  8. Investing

    Mine For Profits With Natural Resource Sector Funds

    These funds allow everyday investors to get in on the action in this promising sector.
  9. Trading

    10 Countries With The Biggest Forex Reserves

    Without adequate reserves, a nation's economy can grind to a halt. Here are the 10 nations with the biggest forex reserves.
  10. Insights

    How US & European Union Sanctions Are Crippling Russia

    Economic sanctions imposed by the US and EU on Russia are having a crippling effect; the Russian economy shrank for the first time in five years.
RELATED FAQS
  1. What economic indicators are most used when forecasting an exchange rate?

    Discover what economic indicators are most widely used to forecast a country’s exchange rate and how various factors influence ... Read Answer >>
  2. What does a negative balance in the capital account mean?

    Understand what a country's capital account represents and the significance of a negative, or deficit, balance in the capital ... Read Answer >>
  3. How are international exchange rates set?

    Knowing the value of your home currency in relation to different foreign currencies helps investors to analyze investments ... Read Answer >>
  4. How do changes in national interest rates affect a currency's value and exchange ...

    Generally, higher interest rates increase the value of a given country's currency, but Interest rates alone do not determine ... Read Answer >>
  5. What are key benefits to a country that has engaged in a policy of currency depreciation?

    Learn about key benefits to a country engaging in a policy of currency depreciation, such as smaller trade deficits, employment ... Read Answer >>
Hot Definitions
  1. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  2. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  3. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  4. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  5. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
  6. Sharpe Ratio

    The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
Trading Center