continues to be used loosely whenever one sees harmful consequences of discoveries or sudden upward revaluation of exported natural resources in developed and developing countries.<sup>12</sup> Official reports published by the World Bank Group are no exception to this tendency, which raises the possibility that its advice could be misleading or discourage countries from pursuing the necessary policy actions (Box 1).

## **Box 1.  Review of World Bank Documents**

To investigate some of the common pitfalls associated with “Dutch disease,” we reviewed 28 country-specific, official World Bank reports that use the term, are publically available, and were published from 2000 onwards.<sup>a</sup> The review confirms that there are some persistent misunderstandings about Dutch disease. In these documents, precision varies widely. While some reports carefully consider the Dutch disease concept and assess whether the country is exhibiting signs of the phenomenon, many other documents just mention Dutch disease as a risk and propose policy actions with little analysis.

_Definition_ . Of the 28 reports, only four provide a precise definition that adheres to the original interpretation. While 11 country documents do not define the term at all, the remainder misinterprets Dutch disease as “harmful consequences of large foreign currency inflows,” “unproductive government spending,” or “increased volatility.” The inconsistent interpretation of the concept raises great concern, since definitions anchor the subsequent policy discussion and begin to delineate the problem.

_Policy advice_ . Among the 28 World Bank publications considered, 20 offer policy advice. Only four reports suggest what might be considered as a “best practice” policy package, addressing volatility concerns and structural issues to enhance overall competitiveness. Of the remaining reports, the biggest group of reports offers a partial solution, focusing narrowly on fiscal measures, such as prudent fiscal management, counter-cyclical fiscal policies, or rule-based strategy to prevent real appreciation or avoid Dutch disease.<sup>b</sup> Others recommend stand-alone policy actions, such as the accumulation of international reserves to avoid nominal appreciation of the local currency, or sterilization of balance of payments surpluses to mitigate upward pressures on the real exchange rate.

While the Bank reports do not engage in some of the most damaging myths found in other literature, the rigor they exhibit is inconsistent. Few of the reports give harmful suggestions, but the lack of precision—a hasty definition or none at all or an over-reaching policy prescription—could lead to misinterpretation.

___________________________ a The documents range from Country Economic Memoranda and Public Expenditure Reviews to smaller-scale policy papers and economic updates that give specific policy advice to governments. b Two of the 28 reports define “avoiding or curing Dutch disease” as a main policy objective of a country operation.

# **Myth 6.  Dutch disease hampers productivity growth by limiting learning-by-doing opportunities.**

The proposition that positive externalities accrue only to the manufacturing sector is illogical in today’s world, in which the share of manufacturing in most economies has been on the fall. Few now attributes to manufactured exports any special role in generating productivity growth.

Those who worry about Dutch disease are concerned that resource reallocation away from the export sector, in particular manufacturing, could permanently jeopardize a country’s long-term growth potential.

> performance.  While Sachs and Warner (1995) find specialization in resource exports to have a strong negative impact on growth, more recent studies dispute the Sachs and Warner findings on measurement and econometric grounds, and find results that suggest a “resource blessing”.  See, for instance, Lederman and Maloney (2007), Brunnschweiler and Bulte (2008), van der Ploeg and Poelhekke (2009), and Haber and Menaldo (2011).  See Lederman and Maloney (2007) for more discussion on the endogeneity issue, as well as Myth 8 for further discussion on resource curse.

> 12 Canuto (2007).

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