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Diagnosing the dutch disease: Are the symptoms present in Bhutan?

Norbu, Nyingtob (2017): Diagnosing the dutch disease: Are the symptoms present in Bhutan?

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Bhutan’s economy has evolved significantly since embarking on a period of modern development in 1960 when its first motor road was built. Underpinning its economic growth is the hydropower sector among other drivers, which has accounted for nearly 40% of exports on average in the last 5 years. However, the earnings thus far pale in comparison to what is projected with the completion of the recent massive surge in investments in the sector. The destabilizing effects of an unpreparedness to manage such inflows have already begun to manifest in the construction phase of Bhutan’s hydropower pursuits as evidenced by the recent balance of payments challenges. Hence, we can intuitively forecast the implications once these power plants are operational and export revenues surge exponentially. The academic consensus on the negative correlation between natural resource dependence and economic growth has been conceptualized in a framework known more popularly as the Dutch Disease. In this paper we attempt to technically assess whether the economy exhibits the symptoms associated with a Dutch Disease based on the three channels which include (1) the resource movement effect, (2) the spending effect and, (3) the monetary effect. Additionally, we also conduct an analysis of another important symptom- the Bilateral Real Exchange Rate- to ascertain whether it has been under pressure and the determinants of its movement. While we do find evidence of some of the symptoms such as real exchange rate appreciation, the estimates aren’t robust enough to categorically attribute these symptoms to power exports or a monetary disequilibrium in our framework. However, we argue that the traditional model may have to be tweaked slightly in our case because more traditional outcomes such as the resource movement effect probably manifest in different ways.

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