Constitutional Economics and Public Institutions
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Constitutional Economics and Public Institutions

  • New Thinking in Political Economy series

Edited by Francisco Cabrillo and Miguel A. Puchades-Navarro

This extensive book explores in detail a wide range of topics within the public choice and constitutional political economy tradition, providing a comprehensive overview of current work across the field.
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Chapter 10: The political economy of Dutch Disease: a survey

Martin Paldam

Extract

It is well known that most resource-rich countries become wealthy in the short run, but grow less than other countries in the longer run, so that the long-run effect is ambiguous. This is illustrated in Section 3 which looks at OPEC countries. The standard explanation is that even though resource-rich countries get a high income, they come to suffer from Dutch Disease, which generates low and often erratic growth. The ‘disease’ element is defined as follows: Dutch Disease is the resource induced revaluation of the real exchange rate. The best-known theory of Dutch Disease is found in a couple of unusually lucid papers by Max Corden, who considers the resource sector as a booming sector in the economy. Like Corden, we take oil to be the archetypal resource. This chapter changes the theory to take the development in technology and scarcities into account: today, a resource sector (notably an oil sector) is a small international enclave in the economy. Sometimes it is even offshore.

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