Workers’ Remittances and the Dutch Disease: Evidence From South Asian Countries

Abstract

Large inflows of foreign money into a country can appreciate its domestic currency, which can adversely affect its current account balance. South Asian countries receive a significant amount of foreign currency as remittances. In this paper, we examine the Dutch disease effect of remittances in five South Asian countries, namely Bangladesh, India, Nepal, Pakistan and Sri Lanka using panel data from 1975 to 2014. Panel cointegration test provides evidence of the long-run relationship between remittances and the real exchange rate. The Fully Modified Ordinary Least Squares Method (FMOLS) is used to estimate the impact of remittances on real exchange rates. The findings suggest that remittances do appreciate the real exchange rate in South Asia. Pesaran, Shin, and Smith ([1999]. Pooled Mean Group Estimation of Dynamic Heterogeneous Panels. Journal of the American Statistical Association, 94, 621–634) Pool Mean Group (PMG) estimation technique is used to check the robustness of the findings. The PMG test results confirm the findings from the FMOLS.

KEYWORDS:

• Remittances
• Exchange Rate
• International Migration
• South Asia

JEL CLASSIFICATIONS:

• E31
• F22
• F31

Acknowledgements

We would like to thank the Editor and two anonymous reviewers for their helpful comments. Our special thanks go to Dr. Josiah R. Baker (Professor at Methodist University) for his help and suggestions during the revision. Any remaining errors are ours.

Disclosure statement

No potential conflict of interest was reported by the authors.

ORCID

Hem Chandra Basnet http://orcid.org/0000-0003-1726-6166

Notes

1 Sachs and Warner (1995) and Sachs and Warner (2001), have shown evidence of a “curse of natural resources” (the Dutch Disease) for resource abundant countries. They argue that positive wealth shocks from a new exportable natural resource sector results in a decline in production of manufacturing sector.

2 For example, see Athukorala and Rajapatirana (2003), Lartey (2007) and Lartey (2011) for the impact of FDI-induced capital inflows. Poncela, Senra, and Sierra (2017) report that Colombia faces the real exchange appreciation due to boom in its main exportable commodity (i.e., coffee and oil) prices.

3 Similar results are also found by Mandelman (2013).

Additional information

Notes on contributors

Hem Chandra Basnet

Dr. Hem Chandra Basnet is an Associate Professor of Financial Economics at Methodist University, USA. Dr. Basnet's research areas are Consumer Finance, International Finance, Macroeconomics, and Economic Development.

Ficawoyi Donou-Adonsou

Dr. Ficawoyi Donou-Adonsou is an Assistant Professor of Economics at John Carroll University, USA. Dr. Donou-Adonsou research focuses on Consumer Finance, Economic Growth and Development, and Monetary Economics.

Kamal Upadhyaya

Dr. Kamal Upadhyaya is a Professor of Economics at University of New Haven, USA. Dr. Upadhyaya's research interests include International Trade and Finance, Economic Development, and Public Choice.