The Macroeconomic Effects of the Dutch Disease

 Natural resource boom industry (oil sector),

 Trade sector (manufacturing)

 Non-commercial areas (health, education, service).

While two of the three sectors (oil and commodities sector) are estimated in the international market, the prices of non-commercial areas are determined in the national market.

The Dutch Disease has various effects on the domestic economy, especially the resource allocation effect and the expenditure effect. The negative effects of the technologically developing parts of the industrial sector in Japan in the 1960s on the less dynamic tradable sectors including agriculture. The excessive increase in the issuance of Swiss bonds and currency led to the real appreciation of the Swiss franc in the 1970s and its negative effects on other Swiss export and

9 Corden, W. M. (1983). The economic effects of a booming sector. International Social Science Journal, 35(3), pp. 441-54.

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import competing industries. For example, steps have been taken towards capital controls to soften this development in Switzerland. The discovery of gold mines in Australia in the 1850s resulting in Dutch Disease-like effects on the industries of this economy. In Australia, a four-fold increase in wages and domestic price pressures have been observed. High wages have led to the decline of the competitiveness of Australia's tradable agricultural sector. When the gold mines were exhausted, agricultural production in Australia started to increase again. Historically, it is possible to mention the transformation in the industrial structure that occurred as a result of the flow of American precious metals to Spain in the 16th century. In this respect, it is important to examine the effects that cause sectoral transformation. The Dutch Disease theory, in a way, provides information about the direction of the structural change in the economy. That is, if some industries experience contraction while other industries experience expansion, the total capacity of the economy to produce goods and services will expand. It will be observed that a sectoral export boom will lead to adverse general equilibrium effects in the tradable industries of the economy.¹⁰ 1.2.1 Resource Allocation Effect

People, tribes, nations and states that had competed and fought with each other for grasslands where their animals could be well fed 4-5 centuries ago have been waging the same war and race in order to have more energy resources than they have since the industrial revolution. However, energy is one of the main inputs required to produce. Countries that have energy resources can use their power in international politics and direct world policies.¹¹

When a country has natural resources, the explosion of excavations in the country's natural resource sector increases the marginal product of the factors used in this sector. Increase in oil prices increases the demand for labor and capital in the oil sector. Of course, the salary is growing.

This demand pushes labor and capital from the manufacturing and service sectors to the oil sector.

As a result, production and employment in the oil sector will increase. As the prices in the production sector are determined in the international market, the demand for decrease in production will not change. Decreased production in the service sector will cause excessive demand. As a result, prices in the service sector will increase. Also, the real exchange rate will be

10 Corden, W. M., and Neary, J. P. (1982). Booming sector and de-industrialisation in a small open economy. The economic journal, 92(368), pp. 825-848.

11 Kovusova, Sh. (2018). The Republic of Turkmenistan and its macroeconomic structure before and after independence. Details Magazine, 5 (58).

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evaluated.¹² In a sense, the Dutch Disease hypothesis provides information on the direction of the structural change in the economy.

The decline of the non-oil sector in the economy and the structural changes in the development of the petroleum sector cause the deterioration in the domestic supply and demand ratio on imports, and this affects the production competitiveness of the country negatively. There are many examples showing that the developing sector did not affect other sectors negatively.

1.2.2 Spending Effect

The different macroeconomic effects of Dutch Disease are known as expenses. If some of this demand is directed to the services produced in the country, the prices of the other two sectors will not change in the foreign market, so the service prices will increase. Increasing demand for the service sector causes an increase in the service supply. This increases prices in the service sector.

Such a situation will encourage production and oil sector workers to move into the service sector.

The spending effect stems from the increase in wealth created by the high additional profit caused by the rich resource. The increase in income is spent on non-tradable goods and services, and thus their relative price (relative to tradable goods) increases. This increases the value of the real exchange rate. Thus, the spending effect refers to the shrinkage in the tradable goods sectors parallel to the rise in the real exchange rate. Managing the spending impact is of particular importance for developing countries. The principle of the development of the Dutch disease consists of the booming resource sector of the country's economy. These are all products traded on the world market (excluding raw materials) and non-traded products (eg services). When the price of the products of the resource sector rises for a long time, they are under the influence of the wage increase in the commodity sector. It is observed that there is an outflow of labor resources and capital outflow from the trade sector. Due to the inflow of foreign exchange earnings into the country, the increase in real income makes the products of this sector less competitive, which has a number of negative consequences. An important aspect of Dutch Disease is its spread over time.

The sharp decline in production and employment in trade in the tradable goods sector means the emergence of unprofitability and bankruptcy of manufacturing enterprises, agriculture and high-tech industries; this leads to high structural unemployment and low wages in categories of workers,

12 Magud, N., and Sosa, S. (2013). When and why worry about real exchange rate appreciation? The missing link between Dutch disease and growth. Journal of International Commerce, Economics and Policy, 4(02), 1350009.

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particularly in sectors with high knowledge. Additionally, commodity markets are characterized by strong price volatility. This leads to strong macroeconomic instability.¹³

In order to avoid the damage of the Dutch Disease, it has not been possible for the countries to direct their revenues from the high earnings boom towards long-term targets. What is important here is that the spending effect causes the loss of profits in the short term. Moreover, if the energy sector, which is experiencing a boom in income, consumes relatively little of the resources employed in other parts of the economy, then the resource allocation effect will be used to a negligible volume. The main effect of the recovery in the economy will be seen through the expenditure effect. Higher real income from the revenue boom in the energy sector will make it possible to spend more on the services sector, raising the prices of these products (ie real appreciation), which will require further adjustments to the economy. The importance of the spending effect will be positively correlated with the marginal propensity to consume service products. This is the real evaluation. As a result of this real appreciation, resources will shift from tradable sectors that experience and does not boom profits to the non-tradable sector.¹⁴

1.2.3 Total Effect

It is unclear how and in what direction these two effects affect output and employment in the oil and service sectors, as the resource allocation effect and the expenditure effect, which have two important effects, operate in opposite directions. The relative increase in the prices of services will cause the exchange rate to appreciate. Since the distribution of raw resources and the spending effect on the output and employment of the manufacturing sector will have negative consequences, there will be a net shrinkage in the manufacturing sector.

1.2.4 Low Economic Growth Impact

Countries rich in natural resources have less access to natural wealth. If the natural resource sector has a great advantage over any country's exports, that country will be more affected. In a country rich in natural resources, many studies have been conducted on the negative effects of these resources. In the 1990s, the Economic Status of the Countries (Netherlands, Norway etc.) with

13 Kubar, Y. (2015). Economical dimension of curse of natural reserce (CNR). Energy and Sustainability:

Theoretical and Applied Perspectives, 69.

14 Corden, W. M., and Neary, J. P. (1982). Booming sector and de-industrialisation in a small open economy. The Economic Journal, 92(368), pp. 825-848

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regard to natural resources was reviewed by the World Bank in 2002. The share of the natural resources sector in total exports declined from 15 percent to 6 percent in the 10-year period. At the same time, GDP per capita in countries ranging from 15 to 50 percent fell by 1.1 percent. GDP per capita showed an average decrease of 2.3 percent in GDP per capita.¹⁵ The increase in the amount of goods and services produced in countries shows its effect on economic growth. This effect depends on the level of interest rates and whether the foreign resources obtained are effectively utilized.