Booming Sector and De-Industrialisation in a Small Open Economy

Abstract

This paper attempts to provide a systematic analysis of some aspects of structural change in an open economy. In particular, we are concerned with an increasingly common phenomenon in both developed and developing countries, sometimes referred to as the 'Dutch disease': the coexistence within the traded goods sector of progressing and declining, or booming and lagging, sub-sectors. In many cases -minerals in Australia, natural gas in the Netherlands, or oil in the United Kingdom, Norway and some members of O P E C -t h e booming sector is of an extractive kind, and it is the traditional manufacturing sector which is placed under pressure. Hence a major aim of the paper is to explore the nature of the resulting pressures towards 'de-industrialisation'. 1 However, our analysis is equally applicable to cases where the booming sector is not extractive (such as the displacement of older industry by technologically more advanced activities in Ireland, J a p a n or Switzerland). This is so because we are primarily concerned with the medium-run effects of asymmetric growth on resource allocation and income distribution, rather than with the longer-run issue of optimal depletion rates which has been the focus of recent work on the economics of exhaustible resources. (See Dasgupta and Heal, 1978.) Moreover, in order to highlight the structural aspects of a boom we ignore monetary considerations and focus on its implications for real rather than nominal variables. We are thus able to draw on and extend the standard tools of international trade theory in order to throw light on the specific problem of a sectoral boom.