Saturday, August 11, 2007

The Tech-Dutch Disease

I believe that there is certain similarities between the tech bubble in the United States in the 90s and the Dutch Disease in the 60s. I think we can draw certain similarities and understand some of the causes and consequences of having such a strong industry pushing the economy.


Dutch disease is an economic concept that tries to explain the seeming relationship between the exploitation of natural resources and a decline in the manufacturing sector. The theory is that an increase in revenues from natural resources will deindustrialise a nation's economy by raising the exchange rate, which makes the manufacturing sector less competitive. (Wikipedia)

The classic economic model describing Dutch Disease was developed by the economists W. Max Corden and J. Peter Neary in 1982. In the model, there is the non-traded good sector (this includes services) and two traded good sectors: the booming sector, and the lagging sector, also called the non-booming tradable sector. The booming sector is usually the extraction of oil or natural gas, but can also be the mining of gold, copper, diamonds or bauxite, or the production of crops, such as coffee or cocoa. The lagging sector generally refers to manufacturing, but can also be agriculture; there can be deagriculturalisation in addition to deindustrialisation. (Wikipedia)

A resource boom will affect this economy in two ways. In the resource movement effect, the resource boom will increase the demand for labor, which will cause production to shift toward the booming sector, away from the lagging sector. This shift in labor from the lagging sector to the booming sector is called direct-deindustrialisation. However, this effect can be negligible, since the hydrocarbon and mineral sectors generally employ few people.[3] The spending effect occurs as a result of the extra revenue brought in by the resource boom. It increases the demand for labor in the non-tradable, shifting labor away from the lagging sector. This shift from the lagging sector to the non-tradable sector is called indirect-deindustrialisation. As a result of the increased demand for non-traded goods, the price of these goods will increase. However, prices in the traded good sector are set internationally, so they cannot change. This is an increase of the real exchange rate.[4] (Wikipedia)


Lets run a parallel analysis between the tech boom and bubble bust in United States in 2000 with the Dutch disease in the 60s-70s in the Netherlands.

Lets run the ideas in parallel to see where we get to:


Dutch Disease

Tech Boom and Bubble Bust

Time Frame


Late 1990s - 2000




United States

Booming Sector

Natural Gas

Technology + Internet


(i) Productivity factors

Couldn’t increase productivity of other goods or services being produce. So any increase in demand would go directly to prices

Productivity raise up with new sector offering and demands creating an initial virtuous cycle of production.

(ii) Role of Government

Generous Welfare worsening the situation (more inflation)

Didn’t play any role (?). From my understanding Maybe laws on immigration helped the bubble. There were alot of technical people being hired from foreign countries to work in Sillicon Valley. But I view this as something positive that revamps the technology/knowledge levels of the country.

(iii) Role of Central Bank

Didn’t control for high inflation because it was PEG to the dollar (read: Bretton Woods)

Couldn’t keep raising interest rates. Thus provoking later on a house boom also.


(a) Resource Movement consequences

Wage consensus for all industries (so booming sector raised the wages for everyone)

Close to full employment? At least we know that every sector was having problems hiring young employees due to internet/technology industries (i.e. start-ups). You could see how the finance industry that normally had all the MBAs were being over compensated to discourage them to go to work for a start-up company.

(b) Spending Effect

The energy sector boom increased consumer spending on non-traded goods and services such as real estate, education, health and construction. Increase demand combined with high wage cost push inflation up.

The tech sector boom influence the financing side of the equation creating a valuation bubble instead of inflation.

(c) Real Appreciation of the local currency

Pressure from lack of competitiveness due to the combination of inflation and fixed exchange rates.

It is tough for me to come up with a good example that shows the real appreciation of the dollar on this period but maybe the devaluation of other strong currencies in comparison with the dollar can prove this point.


It is clear that the Tech Bubble in the US had certain characteristics of Dutch Disease. The only clear difference that could make this entire analysis incorrect is the relationship of the Tech/Internet industry with the entire economy. On one side technology is clearly link to the entire economy. Development or research spent in technology would later be helpful to the entire economy. Spill overs are expected. On the other when we talk about Dutch Disease my understanding is that there is few spill overs to the entire economy. For example, the development of the oil industry doesn't cause technology of the manufacturing or agriculture sector to improve.

The US economy had the pressure of a booming sector (internet/technology). On one hand it had the 'resource movement effect'. People and money were going to the internet economy and not to the traditional industries. Nevertheless the good effects of such movement were the rapid development of new technologies that would later help the traditional economies. It is like if the development of the oil industry would cause new technology in the development of the manufacturing industry. This would help in the future. The 'spending effect' was not that clear. Prices for real estate (for example) were going up. I don't know if the price increase was because there were few developments due to the lack of resources or because there were excess liquidity. Despite the reason of the causes, the consequences were clear. The tech bubble created an a bubble in the entire market economy that ended up with the correction of 2000. Just recently the S&P, Dow Jones and other indexes recovered from that crash of 2000 that took almost 50% of the value of some of those indexes.