Dutch Disease Theory Analysis

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One of the leading explanations to be presented in relation to the resource curse theory is that of the “Dutch Disease” theory established by Matsuyama (1992), which argues that when an organization or country specializes in a particular type of resource production, the combination of the specialization as well as the appreciation of the exchange rate will then result in a decline and will become more conducive to other industries which are not going to lead to the same economic growth (Lutz, 1994). One of the potential dangers of oil booms, for example, is that exchange-rate appreciation renders the non-oil-tradable sectors such as manufacturing less competitive and thus can generate de-industrialisation. The related Dutch Disease thesis …show more content…

Rents refer to the "excess incomes," or the "proportion of earnings in excess of the minimum amount needed to attract a worker to accept a particular job or a firm to enter a particular industry." Rents can take many forms such as higher than competitive rates of return in monopolies; extra income earned from exclusive ownership of a scarce resource, whether natural resources or specialized knowledge; or extra income from politically organized transfers such as subsidies. Since rents specify incomes, which are higher than would otherwise have been earned; they create incentives to generate and maintain these rents. These influencing activities range from bribing and coercion to political lobbying and advertising. In the mainstream view, the availability of rents is the ultimate source of rent seeking and corruption. This can typically be achieved by manipulating regulatory agencies or trying to gain some form of advantage in the market, while placing others at a competitive disadvantage. This type of rent seeking behaviour, particularly from those involved in a high level of management of natural resources can then create a situation whereby those individuals benefit and the overall country does not (Papyrakis and Gerlagh,

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