Dutch Disease Simulator

Dutch Disease describes the negative consequences that arise when a natural resource boom causes currency appreciation and deindustrialisation. The term was coined by The Economist in 1977 to describe the Netherlands' experience after discovering natural gas in Groningen in 1959.

Two Mechanisms (Corden & Neary, 1982)

1. The Spending Effect — resource revenues increase national income, boosting demand for non-tradable goods (services, construction). These can't be imported, so their prices rise. This pushes up the real exchange rate, making exports less competitive.

2. The Resource Movement Effect — higher wages in the booming resource sector attract labour and capital away from manufacturing. This directly reduces the tradable goods sector even before any exchange rate effect.

Why does it matter?

• Hysteresis: Once manufacturing capacity is lost — skills atrophy, supply chains dissolve — it is very costly to rebuild. The damage is persistent.
• Volatility exposure: An economy dependent on commodity prices faces boom-bust cycles outside its control.
• Spillover loss: Manufacturing generates knowledge spillovers, R&D, and productivity growth that resource extraction typically does not.

Policy response — the Sovereign Wealth Fund

Saving resource revenues abroad (as Norway does with its Government Pension Fund Global) "sterilises" the boom — keeping money out of the domestic economy and preventing the spending effect from driving up the real exchange rate. This is the key policy variable in this simulator.