External Sector
The Dutch Disease: When a Boom Hurts
Disease?
Can a country get “sick” from getting richer? Can an enormous economic success, like discovering oil or gas, end up causing problems? This is precisely what happened in the Netherlands in the mid-1900s. The lesson, known as “Dutch Disease,” is still relevant for many countries today.
So lets get into it!
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What Is Dutch Disease and Where Does It Come From?
“Dutch Disease” is the name given to the negative effects that can happen when one part of a country’s economy exports grow too fast, usually because of a discovery like oil, gas, or another valuable resource. The term comes from what happened in the Netherlands in 1959, when a giant natural gas field was found in Groningen, in the north of the country.
At first, this seemed like great news. Exports grew, the economy expanded, and foreign money came flooding in. But over time, other parts of the economy began to suffer.
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How Does It Work?
The problem mainly involves the exchange rate. When a country suddenly earns a lot of foreign money by selling a popular product, its local currency strengthens. This makes all other locally produced goods more expensive for buyers in different countries.
Booming sectors—like gas or oil—can survive with a strong currency. But other sectors, like farming or manufacturing, might not. They lose their ability to compete internationally, and businesses may shrink or shut down. This is especially harmful when those other sectors create more jobs or depend on advanced skills and technology.
If the booming sector is based on a resource that will run out, the problem becomes bigger. Once the resource dries up, the country may have a weak industrial base and high unemployment.
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So, What Is The Cure? What Can Governments Do?
As with many real illnesses, prevention is better than a cure. Governments and central banks can act early to avoid the adverse side effects. For example, they can buy up foreign currency (using the central bank or treasury) to stop their currency from rising too much. This helps protect other sectors from losing competitiveness.
They can also tax the booming sector and use that money to support industries essential for long-term growth, like those that create jobs, use technology, or help the country diversify.
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Real World Examples
Guyana (2025): The government denied suffering from Dutch Disease, saying the real issue was that private miners were hiding gold instead of declaring it.
Norway (2025): Norway is often praised for managing its oil wealth. By saving its oil revenue in a national fund and limiting currency appreciation, it protected the rest of its economy.