fossilfuelopolis

Prospecting the academic grounds on global energies patterns

Dutch Disease

The comparative advantage constituted of abundant cheap fossil fuel for which the world markets demonstrate relentless demand can become a “resource curse”. Increased dependency on imports and declines in the non-booming tradable sectors- the “Dutch Disease”- is a pathology observed in the oil-rentier economies afflicted by price shocks.

The booming oil sector tend to distort the patterns of growth in the agricultural and other tradable productive sector of the economy (Gelb, 88).

In the 70s, booming North Sea gas exports pumped massive oil rents into the Dutch economy, which appreciated the Dutch guilder, and in doing so, exposed Dutch manufacturers to more intense foreign competition and higher unemployment.

The booming oil sector usually attracts rural workers contributing to relative devaluation of local food products; the same can happen in the manufacturing sector. Capital is reallocated to the oil sector, where returns are higher. Since the government is the principal recipient of oil rents, there is a tendency for its bureaucracies to expand. Financial services also increase to meet the needs of incoming foreign exchange.

Oil windfalls lead to an appreciation of the real exchange rate by shifting production inputs to the booming mineral sector (retail trade, services, and construction), thereby reducing the competitiveness of the non-booming sectors of agriculture and manufacturing, hence causing their collapse.

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