Effects
In simple trade models, a country ought to specialise in industries in which it has a comparative advantage, so theoretically a country rich in natural resources would be better off specialising in the extraction of natural resources.
Other models and theories suggest that this could be detrimental. For instance, when the natural resources begin to run out or if there is a downturn in prices and competitive manufacturing industries cannot return as quickly or as easily as they left. This is because technological growth is smaller in the booming sector and the non-tradable sector than the non-booming tradable sector. Since there has been less technological growth in the economy relative to other countries, its comparative advantage in non-booming tradable goods will have shrunk, thus leading firms not to invest in the tradables sector. Also, volatility in the price of natural resources, and thus the real exchange rate, may prevent more investment from firms, since firms will not invest if they are not sure what the future economic conditions will be.
Read more about this topic: Dutch Disease
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—Henry David Thoreau (1817–1862)
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