This note looks at so-called Dutchdisease, a phenomenon reflecting changes in the structure ofproduction in the wake of a favorable shock (such as a largenatural resource discovery, a rise in the internationalprice of an exportable commodity, or the presence ofsustained aid or capital inflows). Where the naturalresources discovered are oil or minerals, a contraction orstagnation of manufacturing and agriculture could accompanythe positive effects of the shock, according to the theory.The note considers channels through which such naturalresource wealth can affect the economy. It also focuses onthe development implications of Dutch disease, particularlythe potential negative effects related to productivitydynamics and volatility; and concludes with a summary ofpossible policy responses, including the mix of fiscal,exchange rate, and structural reform policies.
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