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Essay: The Dutch disease

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  • Published: 16 June 2012*
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The Dutch disease

1. Introduction

Today we live in a globalized world and all countries are somehow related.

In all international trade is necessary to use a currency which is somehow accepted by all countries, and thus make international trade is fluid and thus benefit both to the matters as to which exported.

In the case of Peru’s currency with which you perform most of the operations of international trade is the dollar, that is, our country imports and exports in collecting or selling mostly in dollars, so that domestic companies are affected daily by the exchange rate on this currency.

Following this work takes into account factors such as exchange rate and this affects the national economy and export companies, most known as Dutch disease.

The Dutch disease is a name given to the period when foreign exchange earnings affect the national economy.

Everything is related to the exchange rate that is in the market, suppose that exports increase, while the exchange rate is high compared to the national currency, this will be somewhat detrimental to the economy, since the supply of dollars in the domestic market increased.

If the opposite happens, the foreign currency depreciates with respect to foreign currency, this will also affect the economy and our exporters receive less money after sales at the exchange rate, thus creating a limitation on exports or perhaps by reducing the supply to the foreign market.

This phenomenon is likely in all countries because the market always makes international currencies fluctuate in value against local currencies, for this in our country is the Central Bank Central Bank Reserve, which regulates the exchange rate and allows for a very large supply of foreign currency in our country.

It is recommended that companies in the country intended for every dollar they get from sales for reinvestment, is trying to get these dollars do not remain in the local market at the best not to convert to local currency, as it would than required by the BCR be affected while the supply of dollars in the local market.

2. Origins

The Dutch disease is the name given to the evil consequences caused by an increase in the income of a country due to the exploitation of a resource.

The term given to the early 1960’s when low-income countries increased considerably due to the discovery of gas fields in the North Sea.

Due to increased revenue is the forint appreciate what affected the competitiveness of the country’s oil exports, which raises the name of this phenomenon, this can be deduced from the increase of any resources that generate large inflows of money.

Responses about the damage caused by this disease are given by a classic 1982 study conducted by Warner Max Corden and Neary J.Peter in this study is divided into an economy going through a period of growth in three sectors: two exporters make traded goods sectors and a third of nontraded goods with basic purpose to supply local residents who may be the retail, services and construction. According to the study when a country is contagious Dutch disease, the traditional export sector is displaced by the other two.

3. chronological effects of “Dutch disease” in Peru

The events in Peru were given as the main variable to the “Dutch disease”.

In Peru’s exports kept growing as the economy of Peru, this was the subject of some studies in the Peruvian economy.

During periods of 1890-1977 there was a significant share of exports in country’s growth. This growth had a significant role the income generated by multinational companies as well as the act of consuming massively imported goods, as well as public spending in the population.

The so-called “Dutch disease” had its participation in Peru between the years 1970 to 1990. In times of 1970-1973 the exports were higher than the $ 900 million, but the net flow was outside in a time of a decrease of about (-) 400 million. During the period there is an increase in exports due to the large amount of material exported and prices.

Among other things outside the net flow becomes positive to about 350 million dollars, on the other hand the exchange rate naja in approximately 20% and public spending increases by 30%.

Mining in the section that has far more in that period, on the other hand, the manufacturing and production had a growth at a lower rate with respect to mining.

In this period divided into a number of developments which show some details that happened during the “Dutch disease”.

* In the periods 1978 – 1984 exports rose to be doubled over the previous period, but the net flow of external wing was low (-) 400 million. This gets to the point where for the first time exports are illegal, valuing reach 200 million dollars. Furthermore the rate of change is facing downwards by 8%.

* Public spending grows slowly during the years 1974 to 1977.

* The mining sector is in growth

* The manufacturing sector has a hint of decline

* The production sector nontradables increases by very low percentage.

* In the periods 1970 – 1990 the Dutch disease has affected the Peruvian economy in a moderate.

* The growth of exports as well as the net flow occurs during the years of 1974-1977.

* There is the growth of exports as opposed to the net flow is given as negative for the years 1978-19784.

* Illegal exports appear significant during the years of 1978-1984.

* There is a point where public spending is interrupted in its growth where it decreases due to the stagnation of exports and the fall in loans.

* In addition to illegal exports do not work as expected income.

The Dutch disease existed between aspects of the protection that was given to the manufacturing sector since the early 70’s, this caused that he was not known as a tradable product except during the early 80’s.

Indicators of the Dutch disease

  1970-73 1974-77 1978-84 1978-84
Exports 1 995.0 1475.0 3181.0 2937.0
Net Flow of Foreign Affairs -401.1 352.2 -426.7 326.6
3 Illegal Exports     212.0 405.8
4 Real Exchange Rate 31.9 23.1 20.0 15.3
Public Expenditure 5 3217.0 4265.0 4931.0 4084.0
GDP mining 6 1.3 6.2 6.3 -3.6
Manufacturing GDP 4.8 3.4 -1.0 0.4
Nontradables GDP 6.6 4.2 1.0 -0.1

1. Average annual value of total exports of goods and services in millions of current dollars.

2. Average balance between new disbursements actually paid and the service of long-term external debt plus foreign direct investment, in millions of current dollars. Does not include short-term debt. The service of long-term private debt is an estimate.

3. Refers to the gross value of production of coca paste and cocaine washed. From “The hypothesis of the external constraint,” Table No. 5. The calculation of the value of illegal exports by much SA gives an average result for each of the subperiods of 1.300 million, of which half would enter the national economy.

4. Estimated by dividing the average nominal exchange rate of each year by the GDP implicit deflator (base year 1986) and multiplying by the inflation rate in the United States, the main trade partner.

5. Public expenditure in millions of constant dollars of 1986.

6. In the case of GDP mining, manufacturing and the sector “non-tradable”, it is the arithmetic average real growth rate in the period. The tradable sector includes construction and services. The period has been subdivided into four sub-periods in order to highlight certain features in the evolution of the variables related to the availability of foreign exchange in the economy.

* Source: http://www.iep.org.pe/textos/DDT/ddt46.pdf

4. As the disease affect Dutch exports

The Dutch disease affection in exports was that increasing world demand for exports of nontraditional products to enter this genre more money into the country and this genre there May 1 dollar supply and this led to the exchange rate came down by abundant foreign exchange and local currency to appreciate, because of this non-traditional exports increased price and genre that exports go down, corporate profits declined and many left the market and generated unemployment and the country also the country’s revenue also fell.

This disease occurs mostly in the oil producing countries since the oil price strong inflows of foreign exchange and which would cause at home can be the local currency appreciation or depreciation, if the currency appreciates imports become cheaper and exports become more expensive and this situation brings to savings lost international competitiveness.

This disease caused the exchange rate is affected and this led to increased financial risk because exports have to pay international currency exchange rates may change revaluing or devaluing the national currency of the foreign currency itself, if there income from exports of natural resources in some countries industrialize the economy des through an overvaluation of the currency and this makes them less competitive then the manufacturing sector.

The currency fluctuations affecting exports so that when there is a flow in foreign currency and costs are in local currency, so if you pay down foreign exchange least for exports and open less liquidity to cover the costs of companies in the local currency, this affection to the companies that had more accounts receivable in foreign currency liabilities in that currency because then under the exchange rate substantially and losses on exchange were strong, companies that were under the general income tax had trouble defining their tax result under the effect of exchange rate difference.

5. Effects on the Peruvian economy

At the height of the sector benefited most, in our case of mining, such as the non-tradable sector, typically results in high economic growth despite the obstacles may have other tradable sectors, this would resemble the case of Peru, according to many analysts and certain business groups who believe that the sun is overrated. Data on the real exchange rate (multilateral) based in 1994, do not confirm this hypothesis since the average rate has been devalued 1.9% in 2004 to 0.7% in 2005 and 1.2% in 2006. Which means that in the last three years has materialized a real devaluation of 3.9%

But apparently some analysts do not give much credence to these calculations, to the extent that consumer prices (CPI) would not be a proxy of the costs of exporting companies, according to the rates given by the BCR, using a index of input costs of firms, the real devaluation would have been 9.4% between January 2003 and earlier this year, up more than five percentage points calculated based on the CPI. What would be produced due to lower relative increase in fuel in the country and also that worker productivity increased more than wages.

Viewing an alternative approach, the evolution of the productive sectors in Peru during the last year. To confirm the existence of the alleged overvaluation and the existence of Dutch disease, agricultural and industrial sectors should have been compressed, while non-tradables should have been expanded, and this last if it did, and if expanded significantly, “14.7 % Construction 12.1% in Commerce, 8.2% other services (government and transportation) and 6.9% Electricity-Water. But what is unexpected is that the tradable sectors, which are supposed to be affected by the overvaluation, have also grown considerably as for example in agriculture to 7.2% and non-primary industrial to 5.7%. For if doubt remains, non-traditional exports increased by nearly 1,000 million, equivalent to a 23% “as J�rgen Schuldt (2007).

We could conclude that we do not suffer-at phenomenon, while not harmful disease-the Dutch, thanks to the massive interventions of the Central Bank in the exchange market for several years. Only in 2007 to sterilize the economy had a value above 110 million a week through the sale of certificates of deposit in the short term.

6. Conclusions

The Dutch disease causes financial risks for the country where it occurs as for companies that are part of it, since exchange rates unstable budgets and projections of these businesses are affected.

The importance of institutions like the Central Bank is responsible for maintaining the stable exchange rate can reduce the risk to re-present phenomenon at present and provides economic stability for companies that do business in foreign currency.

I can appreciate that work is the price increase in traditional exports (mining) in Peru is not always positive as it resulted in growth sectors such as the decline of others as was the case of manufacturing sector causing the closure of many factories that represent a large percentage of employment in Peru.

The Dutch disease is the result of international trade is another factor that we must keep in mind about the benefit of the country exporting the importing country.

The Dutch disease has appeared in various countries around the world and different dates so that our country must take precautions on their return to present this kind of phenomenon as a free market economy may lead to bankruptcy many companies and the economic downturn in the country.

7. Bibliography

-Tweezers, Theobald (1993). Interpretation of the relationship between the foreign sector and the global economy. Available at: http://www.iep.org.pe.pdf accessed September 12, 2009.

– Uculmana, Peter. Manual of Trade Finance internacional.Universidad of San Martin de Porres.44pp.

– Sachs, J, Larrain, F (2002). Macroeconomics in the global economy . Publisher Pearson.

– J�rgen Schuldt (2007). Dutch Disease of Peru? Available at: http://www.lainsignia.org/2007/marzo/econ_011.htm accessed September 20, 2009.

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