Policymakers’ Guide to Dutch Disease
Oleh: Tonny F. Kurniawan, Ahmad Heryawan, Iqbal Febriano
What is Dutch Disease?
Title of article in The Economist in 1977, Reduction in a country’s export performance as a result of an appreciation of the exchange rate.
Exchange Rate Nominal : foreign currency vs domestic curreny Real : relative prices between goods (measured in local currency), also referred as terms of trade
Effects of aid Shift of production from exports Shift of production from import subtitutes Additional imports The first two are called “tradables” and together known as Dutch Disease
Effects of Aid Triggered Dutch Disease?
(short-run) Output = Tradables + Non-tradables Effects of Aid Tradables ↓ Non-tradables ↑ Results : No change in output, only in composition Transitional costs Appreciation of non-tradables real exchange rates against tradables > increase of total output in real terms
Effects of Aid Triggered Dutch Disease?
(long-run) GDP = C + G + I + (X-M) Effects of aid (X-M) ↓ C ↑ G ↑ I ↑ Net results : GDP ↑ Distributional effect There will be winners and losers Winners : producers and workers of non-tradables sectors Losers : producers and workers of tradables sectors
What if Aid is not Sustainable ?
1. When aid stops > structure of output shifts back > transitional costs
2. Decrease of exports Benefits of aid not sufficient enough to cover (1) & (2) > long-term profitability ↓
How to Cope ? (recipients’ actions)
Use the aid to build up foreign exchange reserves Use the aid for an import which (a) the country would not have imported otherwise and (b) does not substitute for locally produced goods Spend the aid in ways that has unambiguously large, short term benefits to productivity of exporters
How Should Donors Respond ?
Aid should be more stable Aid should be more predictable Recipient governments should be given discretion to use aid flexibly It is important to direct some aid towards activities that will enhance long-term economic productivity Dutch disease should not be represented as a limitation the amount of sustained aid that can be given to developing countries
Oleh: Tonny F. Kurniawan, Ahmad Heryawan, Iqbal Febriano
What is Dutch Disease?
Title of article in The Economist in 1977, Reduction in a country’s export performance as a result of an appreciation of the exchange rate.
Exchange Rate Nominal : foreign currency vs domestic curreny Real : relative prices between goods (measured in local currency), also referred as terms of trade
Effects of aid Shift of production from exports Shift of production from import subtitutes Additional imports The first two are called “tradables” and together known as Dutch Disease
Effects of Aid Triggered Dutch Disease?
(short-run) Output = Tradables + Non-tradables Effects of Aid Tradables ↓ Non-tradables ↑ Results : No change in output, only in composition Transitional costs Appreciation of non-tradables real exchange rates against tradables > increase of total output in real terms
Effects of Aid Triggered Dutch Disease?
(long-run) GDP = C + G + I + (X-M) Effects of aid (X-M) ↓ C ↑ G ↑ I ↑ Net results : GDP ↑ Distributional effect There will be winners and losers Winners : producers and workers of non-tradables sectors Losers : producers and workers of tradables sectors
What if Aid is not Sustainable ?
1. When aid stops > structure of output shifts back > transitional costs
2. Decrease of exports Benefits of aid not sufficient enough to cover (1) & (2) > long-term profitability ↓
How to Cope ? (recipients’ actions)
Use the aid to build up foreign exchange reserves Use the aid for an import which (a) the country would not have imported otherwise and (b) does not substitute for locally produced goods Spend the aid in ways that has unambiguously large, short term benefits to productivity of exporters
How Should Donors Respond ?
Aid should be more stable Aid should be more predictable Recipient governments should be given discretion to use aid flexibly It is important to direct some aid towards activities that will enhance long-term economic productivity Dutch disease should not be represented as a limitation the amount of sustained aid that can be given to developing countries
