Neutralizing the Dutch disease

This paper discusses the economic policies required to neutralize the Dutch disease—a long-term overvaluation of a national currency originated in the export of commodities—and the political economy involved. The difficulty in addressing this major market failure is associated with two political problems: the natural resource curse, the generalized rent-seeking that often takes over a commodity-exporting country, and exchange rate populism, the practice of keeping the currency overvalued, to ensure the reelection of politicians. While the two political problems have cultural and institutional roots that make them resilient to change, this paper shows that there is a relatively simple policy—a variable export tax on the commodities—that will make the currency competitive and therefore make it possible for the manufacturing industry to flourish.