We review the literature on Dutch disease, and document that shocks that trigger foreign exchange inflows (such as natural resource booms, surges in foreign aid, remittances, or capital inflows) appreciate the real exchange rate, generate factor reallocation, and reduce manufacturing output and net exports. We also observe that real exchange rate misalignment due to overvaluation and higher volatility of the real exchange rate lower growth. Regarding the effect of undervaluation of the exchange rate on economic growth, the evidence is mixed and inconclusive. However, there is no evidence in the literature that Dutch disease reduces overall economic growth. Policy responses should aim at adequately managing the boom and the risks associated with it.
I. I ntroduction
The Dutch disease (DD) phenomenon emerges when the development of a natural resource-based sector, induced from sudden abundance or a price increase, occurs at the expense of a non-resource traded goods sector. 2 The most commonly observed effects of DD are the reallocation of factors of production, a sustained appreciation of the real exchange rate and de-industrialization. These observations arise from what has been dubbed in the literature as the resource-movement and spending effects.
In this paper we search for indications of DD in
The paper employs a heuristic comparative approach suggested by Ismail (2009) to search for evidence of Dutch disease in oil-rich countries of the Central African Economic and Monetary Community (CEMAC). While these countries have benefitted from high international oil prices in recent years, they have also experienced relatively large real exchange rate appreciations, raising concerns regarding the presence of Dutch disease and casting doubts on their ability to achieve high growth and employment in the long run. To isolate from any dynamics related to the exchange rate regime, we focus on the 14 member countries that constitute the CFA franc zone. We separate them into net oil importers and net oil exporters and look at economic growth, the real exchange rate, and the agricultural and external sectors. Based on traditional models, our findings are broadly consistent with the presence of Dutch disease in the second group during the oil-price boom. Departing from these models yields mixed results, suggesting the need to employ a case-by-case approach.
growth, a recent view suggests that Dutch disease lowers economic growth. Thus, economic policy should contain any Dutch disease effects.
The purpose of this note is to examine whether the literature provides strong support for concerns about the potential adverse effects of DD on long-term growth. To this end, we review the existing literature on the so called Dutch disease and on the relationship between the real exchange rate and growth—two related but distinct concepts. We focus on the one hand on the theoretical contributions to rationalize the DDphenomenon and