Answer to Question #202442 in Macroeconomics for Birago Irene

Question

Explain the term Dutch Disease and use it to advise policy makers of your country in the light of the recent discovery and production of oil in Ghana

Answer 1

Solution:

Dutch Disease is an economic situation where an accelerated development of one sector of the economy, especially natural resources result in a decline in other sectors of the economy. It is normally characterized by a significant appreciation of the domestic currency, leading to a drop in exports and an increase in unemployment levels. Dutch Disease brings about a paradoxical situation where good news in one sector of the economy such as the discovery of oil and other natural resources causes a negative impact on the nation’s overall economy. Countries become overreliance on that particular economy and ignore other sectors of the economy resulting in an imbalance.

 

The discovery of Oil has been of economic benefit to most developed countries, while on the other hand, it has brought a curse to the economies of most developing countries. Ghana like many other developing countries is dealing with many challenges as a result of Oil discovery and exploitation. This includes, how to handle the ever-changing oil prices and its output volatility, dealing with its recurrent fiscal imbalance, and good governance and transparency, which could result in Dutch Disease. Ghana should, therefore, resolve these matters by first manipulating the Oil revenue share to be deposited into the national budget and making an overseas investment with the remainder. Ghana also requires structural transformation, by diversifying the economy away from Oil production and putting more effort into agricultural productivity growth. This is because the agriculture sector accounts for a significant percentage of its workforce and hence should be enhanced and value-added to the primary products. Ghana should also massively invest in other sectors of the economy such as public and merit goods hence promoting growth in these sectors. Ghana should also ensure the existence of good governance, transparency, and accountability for proper management and control of its oil wealth, including making effective laws and compliance to protect the oil industry from malicious activities.