Dutch Disease in Latin American countries: De-industrialization, how it happens, crisis, and the role of China

Produced by: 
Munich Personal RePEc Archive
Available from: 
June 2014
Paper author(s): 
Sara A. Wong
Marjan Petreski
Macroeconomics - Economic growth - Monetary Policy

This study investigates if and how different episodes of large net inflows – export boom, remittances, FDIs, or aid – caused Dutch disease in Latin American countries. We investigate this disease – i.e. the decline of manufacturing output – with special reference to the channels through which it works, to the crisis period and to the role of China for LAC. The study conducts analyses at the 3-digit International Standard Industrial Classification level for manufacturing industries. Our results robustly suggest that export, aid and remittances booms may indeed have an adverse impact on the rate of growth of exportable industries. The exchange rate overvaluation has proven to be the channel through which these capital booms induced decline of manufacturing output growth, but only after the work monetary and fiscal policies is considered. The crisis likely softened the Dutch disease effects in LAC. We find China exporting manufactures to some of the LAC does not significantly affect the manufacturing growth of other fellow LAC, but depending on the type of manufacture industry and country considered China may play a negative or positive role for LAC’s manufacturing through the work on third-market competition: Mexican manufacturing suffering significant negative impacts while for the rest of Latin American countries studied the effect of China may be positive.


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