Dutch Disease Economics and Export Boom in Developing Countries: The Oil Boom in Indonesia

This paper analyzes the effects of two policy adjustments, namely exchange rate devaluation and the accumulation of budget surpluses, to the oil export boom in Indonesia. Our results indicate that exchange rate adjustment had a significant impact on expansion of tradable sectors, especially the manufacturing sector, by reversing the real exchange rate. While of maintaining the balanced budget principle, the government exercised delicate operations whereby the budget surpluses were covertly accumulated as government deposits. These policy adjustments were consistent from a macroeconomic management point of view and have contributed to avoiding the ‘Dutch Disease’ stemming from abundant oil revenue.