# **Myth 3.  The Netherlands suffered Dutch disease driven by exploration of natural gas.**

Rising unemployment and industrial stagnation that troubled the Netherlands during late 1970s to mid1980s were not caused by real appreciation as predicted by the standard Dutch disease framework, but rather it was caused by the expansion of social welfare benefits that drove up wages and squeezed firms’ profitability.<sup>8</sup> With the rise in benefits, the social security contributions by both employers and employees grew steadily, leading to economy-wide increases in total labor costs. Pressures on the wages intensified further by the Dutch centralized wage bargaining system, in which the labor productivity indicator of the most productive sector (natural gas) played a central role. Available evidence suggests very little systematic and long-term net adverse consequences of natural gas development on the manufacturing sector.<sup>9</sup>

# **Myth 4.  Dutch disease is caused by wasteful government spending.**

Dutch disease could happen without expansionary fiscal policy or wasteful government spending. All that matters is the extent to which the economy _as a whole_ spends the extra income on non-tradable goods and services. However, the manner in which the government conducts fiscal policy—in terms of the scale and instruments used as well as the allocation and quality of expenditures—is a crucial element in determining the magnitude and direction of the spending effect, and the economy’s supply response to the excess demand. This is particularly the case when a large part of export earnings accrues to the government, most notably natural resource rents.

# **Myth 5.  Dutch disease causes adverse impacts on long-run growth.**

The logic behind Dutch disease suggests nothing inherently growth-inhibiting or indicative of welfare loss.<sup>10</sup> Contrary to widespread belief, Dutch disease, by itself, is not a disease. It is simply a description of the causes and structural effects of boom-induced income growth, i.e., resource reallocation away from a less profitable non-booming tradable sector to sectors that have comparative advantage. The nonbooming tradable sector declines as it is no longer price competitive. However, overall economic growth need not suffer from the shrinking non-booming tradable sector. This is an efficient adaptation of the economy to the new environment and increased wealth, and is not a source of concern on its own, especially when the export boom is expected to be permanent. Views about Dutch disease as intrinsically negative appear to be influenced by the natural resource curse thesis (see Myth 8).

Empirical studies find no definitive evidence that export specialization, including specialization in resource exports (proxy for Dutch disease), reduces long-run growth rates.<sup>11</sup> Yet the term Dutch disease

> 8 The Dutch economic trouble following the natural gas discoveries appears overstated.  According to the BIS data, the Dutch guilder experienced a real effective _depreciation_ (not appreciation) during late 1970s to mid-1980s.  Also, data obtained from the Statistics Netherlands suggest that neither manufacturing output nor exports contracted in real, absolute terms for the same period, although its share in GDP or total exports declined because of the natural gas boom.

> 9 See Kremers (1986) for a good analysis of the impact of natural gas discoveries on the Dutch economy. 10 A number of prominent researchers emphasize this point.  See, for example, Edwards and Aoki (1983), Neary and van Winjnbergen (1986), Krugman (1987), Bean (1988), Davis (1995), Sachs and Warner (1995), Hausmann and Rigobon (2003), Canuto (2007) and many others.

11 Statistical results are sensitive to the changing of the sample period and sample of countries, as well as the way to deal with endogeneity associated with the measure of resource abundance, resource dependency and economic 5