The Dutch Disease in Reverse: Iceland’s Natural Experiment

  • Thorvaldur Gylfason
  • Gylfi ZoegaEmail author
Conference paper


For a long time, abundant natural resources brought Iceland a high and volatile real exchange rate with adverse effects on manufacturing and services. During 2003–2008, another national treasure, the sovereign’s AAA rating, was used by privatized banks to attract foreign capital, elevating the real exchange rate even further. The financial collapse and the associated collapse of the currency in 2008 left the country with a large foreign debt which offset some of the effect of the natural resources on the real exchange rate. In effect, this was the Dutch disease in reverse as witnessed, in particular, by a massive increase in the number of tourists following the financial collapse. This paper discusses the behavior of the exchange rate of the Icelandic króna before and after 2008 as well as its relationship to natural resources, capital flows, output, exports and imports, including tourism.


Natural resource curse Dutch disease Financial crisis 

JEL Classification

F41 O23 O33 


  1. Admati, A., & Hellwig, M. (2013). The bankers’ new clothes: What’s wrong with banking and what to do about it. Princeton, NJ: Princeton University Press.Google Scholar
  2. Akerlof, G. A., & Shiller, R. J. (2015). Phishing for phools: The economics of manipulation and deception. Princeton, NJ and Oxford, England: Princeton University Press.Google Scholar
  3. Alexeev, M., & Conrad, R. (2009). The elusive curse of oil. Review of Economics and Statistics, 91(3), 586–598.CrossRefGoogle Scholar
  4. Aliber, R. Z. (2011). Monetary turbulence and the icelandic economy. In Aliber, R. Z. & Zoega, G. (eds.), Ch. 15, Preludes to the icelandic financial crisis (pp. 302–326) Palgrave Macmillan.Google Scholar
  5. Arezki, R., & Brückner, M. (2011). Oil rents, corruption, and state stability: Evidence from panel data regressions. European Economic Review, 55(7), 955–963.CrossRefGoogle Scholar
  6. Arezki, R., & Gylfason, T. (2013). Resource rents, democracy, corruption and conflict: Evidence from Sub-Saharan Africa. Journal of African Economies, 22(4), 552–569.CrossRefGoogle Scholar
  7. Auty, R. M. (2001). The political economy of resource-driven growth. European Economic Review, 45(4–6), 839–846.CrossRefGoogle Scholar
  8. Baland, J.-M., & Francois, P. (2000). Rent-seeking and resource booms. Journal of Development Economics, 61, 527–542.CrossRefGoogle Scholar
  9. Benediktsdottir, S., Danielsson, J., & Zoega, G. (2011). Lessons from a collapse of a financial system. Economic Policy, 26(66), 183–231.CrossRefGoogle Scholar
  10. Benigno, G., & Fornaro, L. (2014) The financial resource curse. Scandinavian Journal of Economics, 116(1), 58–86.CrossRefGoogle Scholar
  11. Boschini, A. D., Pettersson, J., & Roine, J. (2007). Resource curse or not: A question of appropriability. Scandinavian Journal of Economics, 109(3), 593–617.CrossRefGoogle Scholar
  12. Branson, W. H. (1977). Asset markets and relative prices in exchange-rate determination. Sozialwissenschaftliche Annalen, 1, 69–89; also Reprints in International Finance No. 20, Princeton University (1980).Google Scholar
  13. Brunnschweiler, C. N., & Bulte, E. H. (2008). The resource curse revisited and revised: A tale of paradoxes and red herrings. Journal of Environmental Economics and Management, 55(3), 248–264.CrossRefGoogle Scholar
  14. Burnside, C., & Dollar, D. (2000). Aid, policies, and growth. American Economic Review, 90(4), 847–868.CrossRefGoogle Scholar
  15. Calvo, G. A. (1998). Capital flows and capital-market crises: The simple economics of sudden stops. Journal of Applied Economics, 1(1), 35–54.Google Scholar
  16. Calvo, G. A., & Reinhart, C. M. (2000). When capital flows come to a sudden stop: Consequences and policy options. In Kenen, P. B., Mussa, M., & Swoboda, A. (Eds.), Reforming the international monetary and financial system. Washington, DC: International Monetary Fund.Google Scholar
  17. Calvo, G. A., Izquierdo, A., & Mejía, L.-F. (2004). On the empirics of sudden stops: The relevance of balance-sheet effects. In Proceedings, Federal Reserve Bank of San Francisco.Google Scholar
  18. Calvo, G. A. (2007). Monetary policy challenges in emerging markets: Sudden stop, liability dollarization, and lender of last resort. NBER Working Paper 12788.Google Scholar
  19. Collier, P., & Goderis, B. (2012). Commodity prices and growth: An empirical investigation. European Economic Review, 56(6), 1241–1260.CrossRefGoogle Scholar
  20. Collier, P., & Hoeffler, A. (2009). Testing the neocon agenda: Democracy in resource-rich societies. European Economic Review, 53(3), 293–308.CrossRefGoogle Scholar
  21. Corden, W. M. (1984). Booming sector and Dutch disease economics: Survey and consolidation. Oxford Economic Papers, 36, 359–380.CrossRefGoogle Scholar
  22. Corden, W. M., & Peter Neary, J. (1982). Booming sector and de-industrialization in a small open economy. Economic Journal, 92(368), 825–848.CrossRefGoogle Scholar
  23. Deaton, A. (2013). The great escape: Health, wealth, and the origins of inequality. Princeton, NJ and Oxford, England: Princeton University Press.Google Scholar
  24. Djankov, S., Montalvo, J., & Reynal-Querol, M. (2008). The curse of aid. Journal of Economic Growth, 13(3), 169–194.CrossRefGoogle Scholar
  25. Easterly, W., & Levine, R. (1997). Africa’s growth tragedy: Policies and ethnic divisions. Quarterly Journal of Economics, 112, 1203–1250.CrossRefGoogle Scholar
  26. Frankel, J. (2012). Mauritius: African success story. Center for International Development, Working Paper No. 234. Cambridge, MA: Harvard University.Google Scholar
  27. Frankel, J. (2014). The natural resource curse: A survey of diagnoses and some prescriptions. In R. Arezki & Z. Min (Eds.), Commodity price volatility and inclusive growth in low-income countries. Washington, DC: International Monetary Fund.Google Scholar
  28. Goderis, B., & Malon, S. W. (2011). Natural resource booms and inequality: Theory and evidence. Scandinavian Journal of Economics, 113(2), 388–417.CrossRefGoogle Scholar
  29. Goldstein, M., & Khan, M. (1985). Income and price effect in foreign trade. In R. Jones & P. B. Kenen (Eds.), Handbook of international economics. Amsterdam: North-Holland.Google Scholar
  30. Gylfason, T. (2001). Natural resources, education, and economic development. European Economic Review, 45(4–6), 847–859.CrossRefGoogle Scholar
  31. Gylfason, T. (2015). Iceland: How could this happen? In Andersen, T. M., Bergman, M., & Hougaard Jensen, S. E. (Eds.), Reform capacity and macroeconomic performance in the Nordic countries, Oxford, England and New York: Oxford University Press.Google Scholar
  32. Gylfason, T. (2016). Iceland and Ireland, eight years on. Milken Institute Review, 25 August.Google Scholar
  33. Gylfason, T., & Helliwell, J. F. (1983). A synthesis of Keynesian, monetary, and portfolio approaches to flexible exchange rates. Economic Journal, 93(372), 820–831.Google Scholar
  34. Gylfason, T., Herbertsson, T. T., & Zoega, G. (1999). A mixed blessing: Natural resources and economic growth. Macroeconomic Dynamics, 3, 204–225.Google Scholar
  35. Gylfason, T., & Zoega, G. (2003). Inequality and economic growth: Do natural resources matter? In T. Eicher & S. Turnovsky (Eds.), Inequality and growth: Theory and policy implications. Cambridge, MA: MIT Press.Google Scholar
  36. Gylfason, T., & Zoega, G. (2006). Natural resources and economic growth: The role of investment. World Economy, 29(8), 1091–1115.CrossRefGoogle Scholar
  37. Gylfason, T., Holmström, B., Korkman, S., Söderström, H. T., & Vihriala, V. (2010). Nordics in global crisis. Taloustieto Oy, Helsinki: The Research Institute of the Finnish Economy (ETLA).Google Scholar
  38. Halldorsson, O. G., & Zoega, G. (2010). Iceland’s financial crisis in an international perspective. Institute of Economic Studies Working Paper W10:02, August.Google Scholar
  39. Herbertsson, T. T., Skuladottir, M., Zoega, G. (2000) Three symptoms and a cure: A contribution to the economics of the Dutch disease. CEPR Discussion Paper No. 2364, January.Google Scholar
  40. Hodler, R. (2006). The curse of natural resources in fractionalized countries. European Economic Review, 50(6), 1367–1386.CrossRefGoogle Scholar
  41. Independent Evaluation Office. (2011). IMF performance in the run-up to the financial and economic crisis: IMF surveillance in 2004–07, International Monetary Fund, Washington, DC. See
  42. International Monetary Fund. (2007). Iceland: Selected issues, IMF Country Report No. 07/296, August. See
  43. International Monetary Fund. (2008). Iceland—2008 Article IV Consultation Concluding Statement, 4 July. See
  44. International Monetary Fund. (2016). Iceland—2016 Article IV Consultation, IMF Country Report No. 16/179. See
  45. James, A. (2015). The resource curse: A statistical mirage? Journal of Development Economics, 114, 55–63.CrossRefGoogle Scholar
  46. Johnsen, G. (2014). Bringing down the banking system: Lessons from Iceland. London: Palgrave Macmillan.CrossRefGoogle Scholar
  47. Kristjansdottir, H. (2012). Exports from a remote developed region: Analysed by an inverse hyperbolic sine transformation of the gravity model. The World Economy, 35(7), 953–966.CrossRefGoogle Scholar
  48. Lane, P. R., & Milesi-Ferretti, G. M. (2008). The drivers of financial globalization. American Economic Review, 98(2), 327–332.CrossRefGoogle Scholar
  49. Lederman, D., & Maloney, W. F. (2008). In search of the missing resource curse. Policy Research Working Paper Series 4766, World Bank.Google Scholar
  50. MacKinnon, J. (1996). Numerical distribution functions for unit root and cointegration tests. Journal of Applied Econometrics, 11(6), 601–618.CrossRefGoogle Scholar
  51. Mansoorian, A. (1991). Resource discoveries and ‘excessive’ external borrowing. Economic Journal, 101, 1497–1509.CrossRefGoogle Scholar
  52. Manzano, O., & Rigobon, R. (2007). Resource curse or debt overhang? In D. Lederman & W. F. Maloney (Eds.), Natural resources, neither curse nor destiny. Stanford and Washington, DC: Stanford University Press and World Bank.Google Scholar
  53. Mehlum, H., Moene, K., & Torvik, R. (2006a). Institutions and the resource curse. Economic Journal, 116(508), 1–20.CrossRefGoogle Scholar
  54. Mehlum, H., Moene, K., & Torvik, R. (2006b). Cursed by resources or institutions? World Economy, 29(8), 117–1131.CrossRefGoogle Scholar
  55. Paldam, M. (1997). Dutch disease and rent seeking: The Greenland model. European Journal of Political Economy, 13(3), 591–614.CrossRefGoogle Scholar
  56. Reinhart, C. M., & Rogoff, K. S. (2009). This time is different: Eight centuries of financial folly. Princeton and Oxford: Princeton University Press.Google Scholar
  57. Robinson, J. A., Torvik, R., & Verdier, T. (2006). The political foundations of the resource curse. Journal of Development Economics, 79, 447–468.CrossRefGoogle Scholar
  58. Ross, M. (2001). Does oil hinder democracy? World Politics, 53, 325–361.CrossRefGoogle Scholar
  59. Ross, M. (2011). The oil curse: How petroleum wealth shapes the development of nations. Princeton, NJ: Princeton University Press.Google Scholar
  60. Sachs, J. D., & Warner, A. M. (1995, revised 1997, 1999). Natural resource abundance and economic growth. NBER Working Paper 5398, Cambridge, MA.Google Scholar
  61. Sachs, J., & Warner, A. (2001). The curse of natural resources. European Economic Review, 45(4–6), 827–838.CrossRefGoogle Scholar
  62. Sala-i-Martin, X., & Subramanian, A. (2013). Addressing the natural resource curse: An illustration from Nigeria. Journal of African Economies, 22(4), 570–615.CrossRefGoogle Scholar
  63. Solow, R. (1979). Another source of wage stickiness. Journal of Macroeconomics, 1(1), 79–82.CrossRefGoogle Scholar
  64. Svensson, J. (2000). Foreign aid and rent-seeking. Journal of International Economics, 51(2), 437–461.CrossRefGoogle Scholar
  65. Tornell, A., & Lane, P. R. (1999). The voracity effect. American Economic Review, 89(1), 22–46.CrossRefGoogle Scholar
  66. Torvik, R. (2002). Natural resources, rent seeking and welfare. Journal of Development Economics, 67(2), 455–470.CrossRefGoogle Scholar
  67. Tsui, K. K. (2011). More oil, less democracy: Evidence from worldwide crude oil discoveries. Economic Journal, 121(551), 89–115.CrossRefGoogle Scholar
  68. Van der Ploeg, F. (2011) Natural resources: A curse or a blessing? Journal of Economic Literature, 49, 366–420.CrossRefGoogle Scholar
  69. Van Wijnbergen, S. (1984). The ‘Dutch disease’: A disease after all? Economic Journal, 94, 373–341.Google Scholar
  70. Venables, A. J. (2016). Using natural resources for development: why has it proven so difficult? Journal of Economic Perspectives, 30(1), 161–184.CrossRefGoogle Scholar
  71. World Bank. (2006). Where is the wealth of nations? Measuring capital for the 21st century. Washington, DC.Google Scholar
  72. Younger, S. (1992). Aid and the Dutch disease: Macroeconomic management when everybody loves you. World Development, 20(11), 1587–1597.CrossRefGoogle Scholar

Copyright information

© Springer Nature Switzerland AG 2018

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of IcelandReykjavikIceland
  2. 2.CESifoMunichGermany
  3. 3.Birkbeck College, University of LondonLondonUK

Personalised recommendations