Long-term links between raw materials prices, real exchange rate and relative de-industrialization in a commodity-dependent economy: empirical evidence of “Dutch disease” in Colombia

The term Dutch disease appears in relation to the Netherlands discovery of large gas deposits in the North Sea and its harmful effects on the country industrial sector. The sudden increase in the country’s wealth created an inflow of capital never seen before, which led to an appreciation of its currency and, therefore, a loss of competiveness in the non-energy exporting sector. The purpose of this article is to provide empirical evidence of Dutch disease in Colombia. This country is different from other economies analyzed for Dutch disease since it has been dependent on two different commodities, coffee first and oil lately. Hence, we focus on the long-run analysis and test by means of a vector error correction model whether commodity prices are related to the real exchange rate and the relative manufacturing output. The long-run relations as well as the impulse response analysis clearly show that commodity prices are positively related to the real exchange rate. Thus, increases in commodity prices have a negative effect on the competitiveness of the country. Our result also shows that public spending is a major source of pressure on the Colombian real exchange rate.