van Wijnbergen, S. (1984) ‘The ‘Dutch Disease’: A Disease After-all? ’

Keywords: 

Precept 8 states that revenue volatility ought to be addressed through gradually and smoothly building up domestic expenditure and investment from resource revenues. In applying the principles of the Precept, one issue which arises is how to adjust spending to a rapid increase in resource revenue. The paper by van Wijnbergen directly addresses the challenge posed by Dutch Disease and provides support in considering whether government ought to invest in the traded goods sector.

 

The paper considers the Dutch Disease, (where an increase in resource revenues strengthens a country’s currency in comparison to other country’s, leading to non-oil goods becoming more expensive and thereby making the manufacturing sector less competitive), noting that this is particularly problematic when a process of ‘Learning by Doing’ induced technological progress is confined to the traded goods sector. A short term “decline in that sector may permanently lower income per head compared with what could otherwise have been attained” (p. 41). In light of this the author considers the question of whether oil revenue from a boom and the above mentioned negative effects upon the traded goods sector, should be responded to by an increase in production subsidies. It is found that the optimal production subsidy size depends on a trade off between current welfare cost and the welfare benefits derived by such a subsidy in the future. The answer is dependent upon context:

     - Subsidies ought to be increased to traded goods if the country does not accumulate foreign assets during a boom but rather uses the wealth for consumption.

     - For countries that are able to break the link between oil booms and total expenditure through accumulating foreign assets, no clear answer can be provided. As the income accrued in foreign assets enables the flow of resources to the non-traded goods sector to continue, it may not be necessary to switch to production of non-oil traded goods.

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