The Dutch Disease Mechanism
Dutch disease describes how natural resource wealth can paradoxically harm an economy’s long-term competitiveness. The mechanism works through two channels: the spending effect (resource revenues increase domestic demand, driving up prices for non-tradeable goods and services) and the resource movement effect (labour and capital flow toward the high-wage resource sector, away from manufacturing and agriculture). The result is an overvalued real exchange rate, an uncompetitive non-oil tradeable sector, and a lopsided economy vulnerable to commodity price shocks.
Evidence in Oman
Oman exhibits classic Dutch disease symptoms. The non-oil tradeable sector (manufacturing, agriculture, fisheries) contributes a small share of GDP despite decades of diversification rhetoric. The public sector offers wages significantly above private sector levels, drawing talent away from productive enterprises. The riyal’s peg to the US dollar, while providing monetary stability, means the exchange rate does not adjust to reflect the non-oil economy’s competitiveness. Construction and real estate booms during high oil price periods draw resources toward non-tradeable activities. The private sector struggles to compete with government employment in attracting Omani workers.
Comparative Perspective
All GCC states face Dutch disease to some degree, but the severity varies. The UAE’s Dubai emirate has arguably cured the disease through radical diversification into tourism, logistics, finance, and services. Saudi Arabia’s size provides some insulation through a larger domestic market for manufactured goods. Norway, the global benchmark for managing resource wealth, uses its sovereign wealth fund and fiscal rules to sterilise oil revenues from the domestic economy. Oman’s challenge is acute because its oil wealth is declining, leaving less time and fewer resources for the cure.
Policy Prescriptions
Addressing Dutch disease in Oman requires a comprehensive strategy: using fiscal rules to sterilise windfall revenues (saving rather than spending when oil prices spike); investing in non-oil sector productivity through infrastructure, education, and technology; reducing the public-private sector wage gap to redirect talent toward productive enterprises; using free zones and special economic zones to create competitive enclaves insulated from domestic cost pressures; and potentially reconsidering the exchange rate regime in the long term. The green hydrogen strategy, if successful, would replace oil disease with hydrogen disease unless revenues are managed differently.