Benjamin, et. al.: The 'Dutch' Disease in a Developing Country

Benjamin, Nancy C., Shantayanan Devarajan and Robert J. Weiner. (1989). "The `Dutch' disease in a developing country : Oil reserves in Cameroon". Journal of Development Economics, 30(1), 71-92. http://www.sciencedirect.com/science/article/B6VBV-45N4YMP-28/1/52d7bc2d92c6e8d2c68098621297ee21

This paper examines the effects of the Dutch Disease on a developing country. A CGE is used to determine the effects of the oil boom. The conclusion is that the agriculture sector is likely to be hurt and that manufacturing will reap some benefits.

The Dutch Disease is the result of a large commodity boom, typically that of natural resources such as gas or oil, and the broader, sectoral effects on a country’s economy. Firstly, currency reserves will increase substantially. There will also be a rise in the value of the nation’s currency, which will lead to a decrease in the ability of exports to remain competitive. Exports will decrease and non-tradable sectors of the economy will suffer from inflation. Typically, the effects of the Dutch Disease are examined from the perspective of a developed country.

The “Australian model” is examined. One aspect of this model is the separation of the effects of a natural resource explosion is on both resource movement and spending (73).

The “salient” features of the CGE model are described: “Differentiation between imports and domestic goods by sector…differentiation between Cameroonian exports and other exports…differentiation between exports and domestic goods…sector-specific factors…closure rule [“…the level of foreign savings is…exogenous…the level of investment is determined by the level of savings in the economy…”]…numeraire [nominal exchange rate]…” (80).

The conclusion is that the assumption of imperfect substitutability between domestic and foreign goods is a crucial determinant of the outcome of a boon of natural resources for a developing countries and that different skill-sets of workers will benefit differently.