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Dutch Disease-cum-financialization booms and external balance cycles in developing countries

Author

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  • Alberto Botta

    (Department of International Business and Economics, University of Greenwich.)

Abstract

We formally investigate the medium-to-long-run dynamics emerging out of a Dutch disease-cum-financialization phenomenon. We take inspiration from the most recent Colombian development pattern. The “pure” Dutch disease first causes deindustrialization by permanently appreciating the economy’s exchange rate in the long run. Financialization, i.e. booming capital inflows taking place in a climate of natural resource-led financial over-optimism, causes medium-run exchange rate volatility and macroeconomic instability. This jeopardizes manufacturing development even further by raising macroeconomic uncertainty. We advise the adoption of capital controls and a developmentalist monetary policy to tackle these two distinct but often intertwined phenomena. JEL Classification: F32; O14; O24.

Suggested Citation

  • Alberto Botta, 2017. "Dutch Disease-cum-financialization booms and external balance cycles in developing countries," Brazilian Journal of Political Economy, Center of Political Economy, vol. 37(3), pages 459-477, February.
    • Handle: RePEc:ekm:repojs:v:37:y:2017:i:3:id:95246
    DOI: 10.1590/0101-31572017v37n03a01
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    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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