ABSTRACT
The pathology of Dutch disease has been explored by Max Corden and others who have developed a three-sector model to trace its impacts. Corden's three-sector analysis is a helpful framework for understanding why export abundance leads to problems in developing countries. A growing literature on Dutch disease in developing countries includes three recent contributions utilising models different from Corden's that try to estimate the impacts of export booms. Harberger uses a three-sector model, but one in which output depends on relative prices; hence the resource movement effect is implicit rather than explicit in the model. Several policy instruments protect the lagging sector, but each has serious drawbacks rooted in the political economy of development. Perhaps the most obvious antidote to Dutch disease is to sterilise the rapidly growing revenues of the booming sector. The equivalent of a dual rate is achieved by taxing the booming export sector, and transferring these taxes as subsidies to all other traded goods.
