The paper argues that the Dutch disease, a major market failure, affects almost all developing countries and is an obstacle to growth. The severity of the disease varies with the difference between the ‘current’ or market and the ‘industrial’ exchange rate equilibriums. While neutralisation of the disease is possible, policymakers face major political obstacles since it involves taxing exports and reducing wages. Finally, the author contends, the Dutch disease may arise not only from natural resources but also from cheap labour provided that the ‘wage spread’ in the developing country is considerably larger than in the developed one.
dutch_disease (Download the full text in PDF format)