Managing commodity booms: Dutch disease and economic performance

Commodity booms are usually associated with commodity-exporting countries suffering from real exchange rate appreciation and negative economic consequences, that is, Dutch disease. Yet, there are different ways to manage or not manage the commodity rent earned via exports. Based on a monetary theory of exchange rates and a heterogenous sample of countries, this analysis shows that Dutch disease during commodity booms is not an inevitable outcome. Different macroeconomic characteristics of countries give way to different outcomes. In particular, richer countries, countries with trade surplus as well as those with a history of low inflation are better equipped to avoid real appreciation. Evidence unambiguously shows that countries with real appreciation experience structural change away from manufacturing toward less productive sectors such as construction. Macroeconomic dynamics and political economy factors make it more difficult for developing countries to make long-term use of the rent gained during commodity booms.