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A Policymakers' Guide to Dutch Disease


  • Owen Barder



It is sometimes claimed that an increase in aid might cause Dutch Disease—that is, an appreciation of the real exchange rate which can slow the growth of a country’s exports— and that aid increases might thereby harm a country’s long-term growth prospects. This essay argues that it is unlikely that a long-term, sustained and predictable increase in aid would, through the impact on the real exchange rate, do more harm than good, for three reasons. First, there is not necessarily an adverse impact on exports from Dutch Disease, and any impact on economic growth may be small. Second, aid spent in part on improving the supply side—investments in infrastructure, education, government institutions and health—result in productivity benefits for the whole economy, which can offset any loss of competitiveness from the Dutch Disease effect. Third, the welfare of a nation’s citizens depends on their consumption and investment, not just output. Even on pessimistic assumptions, the additional consumption and investment which the aid finances is larger than any likely adverse impact on output. However, the macroeconomic effects of aid can cause substantial harm if the aid is not sustained until its benefits are realized. The costs of a temporary loss of competitiveness might well exceed the benefits of the short-term increase in aid. To avoid doing harm, aid should be sustained and predictable, and used in part to promote economic growth. This maximizes the chances that the long-term productivity and growth benefits will offset the adverse effects—which may be small if they exist at all—that big aid surges may pose as a result of Dutch Disease.

Suggested Citation

  • Owen Barder, 2006. "A Policymakers' Guide to Dutch Disease," Working Papers 91, Center for Global Development.
  • Handle: RePEc:cgd:wpaper:91

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    References listed on IDEAS

    1. Roodman, David, 2006. "Aid Project Proliferation and Absorptive Capacity," WIDER Working Paper Series 004, World Institute for Development Economic Research (UNU-WIDER).
    2. Knack, Stephen & Rahman, Aminur, 2007. "Donor fragmentation and bureaucratic quality in aid recipients," Journal of Development Economics, Elsevier, vol. 83(1), pages 176-197, May.
    3. Alesina, Alberto & Dollar, David, 2000. "Who Gives Foreign Aid to Whom and Why?," Journal of Economic Growth, Springer, vol. 5(1), pages 33-63, March.
    4. Collier, Paul & Dollar, David, 2002. "Aid allocation and poverty reduction," European Economic Review, Elsevier, vol. 46(8), pages 1475-1500, September.
    5. Morss, Elliott R., 1984. "Institutional destruction resulting from donor and project proliferation in Sub-Saharan African countries," World Development, Elsevier, vol. 12(4), pages 465-470, April.
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    Cited by:

    1. Ranis, Gustav, 2013. "Another Look at Foreign Aid," WIDER Working Paper Series 119, World Institute for Development Economic Research (UNU-WIDER).
    2. Akpalu, Wisdom, 2013. "Foreign Aid and Sustainable Fisheries Management in Sub-Saharan Africa," WIDER Working Paper Series 100, World Institute for Development Economic Research (UNU-WIDER).
    3. Sorrentino, Angelica & Thomasz, Esteban Otto, 2014. "Incidencia del Complejo Sojero: Implicancias en el Riesgo Macroeconómico
      [Macroeconomic Risk: The incidence of soy exports in Argentina between 2003 and 2012]
      ," MPRA Paper 55767, University Library of Munich, Germany.
    4. Jayakar, Krishna & Martin, Brandie, 2012. "Regulatory governance in African telecommunications: Testing the resource curse hypothesis," Telecommunications Policy, Elsevier, vol. 36(9), pages 691-703.
    5. repec:zbw:rwirep:0127 is not listed on IDEAS
    6. Dizaji, S.F., 2012. "The effects of oil shocks on government expenditures and government revenues nexus in Iran (as a developing oil-export based economy)," ISS Working Papers - General Series 540, International Institute of Social Studies of Erasmus University Rotterdam (ISS), The Hague.
    7. Bernard Walters, 2007. "The Fiscal Implications of Scaling up ODA to Deal with the HIV/AIDS Pandemic," Conference Paper 3, International Policy Centre for Inclusive Growth.
    8. Li, Ying & Rowe, Francis, 2007. "Aid inflows and the real effective exchange rate in Tanzania," Policy Research Working Paper Series 4456, The World Bank.
    9. Christos Nikas & Student Anastasia Blouchoutzi, 2014. "Emigrants’ Remittances and the “Dutch Disease” in Small Transition Economies: the Case Of Albania and Moldova," Romanian Statistical Review, Romanian Statistical Review, vol. 62(1), pages 45-65, March.
    10. Volker Clausen & Hannah Schürenberg-Frosch, 2009. "Aid, Spending Strategies and Productivity Effects – A Multi-sectoral CGE Analysis for Zambia," Ruhr Economic Papers 0127, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    11. Nuno Baetas da Silva & João Sousa Andrade & António Portugal Duarte, 2016. "Alternative Sources of Dutch Disease: A Survey of the Literature," GEMF Working Papers 2016-10, GEMF, Faculty of Economics, University of Coimbra.
    12. Akhmetov, Almaz, 2017. "Testing the Presence of the Dutch Disease in Kazakhstan," MPRA Paper 77936, University Library of Munich, Germany.
    13. João Sousa Andrade & António Portugal Duarte, 2013. "The Dutch Disease in the Portuguese Economy," GEMF Working Papers 2013-05, GEMF, Faculty of Economics, University of Coimbra.
    14. Clausen, Volker & Schürenberg-Frosch, Hannah, 2012. "Aid, spending strategies and productivity effects: A multi-sectoral CGE analysis for Zambia," Economic Modelling, Elsevier, vol. 29(6), pages 2254-2268.
    15. Feeny, Simon & de Silva, Ashton, 2012. "Measuring absorptive capacity constraints to foreign aid," Economic Modelling, Elsevier, vol. 29(3), pages 725-733.
    16. Robinson, Sherman & Levy, Stephanie, 2014. "Can cash transfers promote the local economy? A case study for Cambodia:," IFPRI discussion papers 1334, International Food Policy Research Institute (IFPRI).
    17. Bürgi Bonanomi, Elisabeth & Elsig, Manfred & Espa, Ilaria, 2015. "The Commodity Sector and Related Governance Challenges from a Sustainable Development Perspective: The Example of Switzerland Current Research Gaps," Papers 865, World Trade Institute.
    18. Roe, Alan R., 2011. "Aid and the Fiscal and Monetary Responses to Dutch Disease," WIDER Working Paper Series 095, World Institute for Development Economic Research (UNU-WIDER).

    More about this item


    Foreign aid; dutch disease; exchange rate; economic growth; consumption;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • O0 - Economic Development, Innovation, Technological Change, and Growth - - General

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