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Neutralizing the Dutch disease

Bresser-Pereira, Luiz Carlos

No 476, Textos para discussão from FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil)

Abstract: This paper discusses the political economy involved in the required neutralization of the Dutch disease – a long-term overvaluation of a national currency originated in exports of commodities that generate Ricardian rents or benefit from commodity booms. The difficulty in dealing with this market failure is associated to two political problems: the natural resource curse, which is 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 that will effectively turn the currency competitive and the manufacturing industry, a possibility.

New Economics Papers: this item is included in nep-ene and nep-opm
Date: 2018-05
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