RE: Question about "dutch disease"

["Devine, James" <jdevine@xxxxxxx>]

 I'm not an international economist (nor do I play one on TV), but I
understand that this is a version of the "transfer problem." If a country
receives big net transfers from overseas, this raises the value of the
country's currency (assuming floating exchange rates), which in turn hurts
exports, which mostly means manufacturing. I don't know the details of the
Dutch case.
Jim D

-----Original Message-----
From: Bill Lear
To: pen-l@xxxxxxxxxxxxxxxxxxx
Sent: 2/24/02 6:39 PM
>Subject: [PEN-L:23173] Question about "dutch disease"

According to investorwords.com, "dutch disease" is:

     The  deindustrialization of a  nation's economy  that occurs
     when the discovery of a natural resource raises the value of
     that  nation's  currency,  making  manufactured  goods  less
     competitive  with  other  nations,  increasing  imports  and
     decreasing  exports.  The term  originated in  Holland after
     the discovery of North Sea gas.

A nephew of mine who is majoring in economics here in Austin asked me
about this, and I was entirely ignorant of it, but it from what he
told me, it sounded suspicious.  The definition here makes the claim
that when the value of a nation's currency increases,
deindustrialization occurs.  It also claims that discovery of a
natural resource can lead to a rise in a nation's currency.
Simplistic formula like this are often used to mask the operations of
nefarious power, so I'm curious if this is a valid concept, etc.

If a natural resource were discovered, why would it necessarily result
in a rise in value of the currency?  If Nigeria discovers lots of oil,
why could it not use the proceeds from the sale to *increase*
industrialization?  Policy decisions seem to me to be operative here,
but I need some help figuring this out...


Bill