Wednesday, June 12, 2013

The other Dutch Disease

Simon Wren-Lewis and Paul Krugman have written complaining about Dutch contractionary policies, noting, as should be obvious to any reasonable observer, that is is a huge mistake. Graph below shows Dutch rates of growth, and it's clear that the economy is in a recession (the estimate for 2012 growth rate is from here).
Funny thing, if you look at the 1960s, the period of the infamous Dutch Disease, when the discovery of natural gas supposedly impacted negatively the Dutch manufacturing sector (and should have had a negative effect on productivity and growth), then you see that the economy was doing way better than in the post-1973 period. Perhaps we should rename the disease associated with financial liberalization, and monetary policy focused only on inflation (and the austerity policies that often go hand in hand) as the real Dutch Disease.

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