Workers’ remittances and the Dutch disease in South Asian countries

ABSTRACT

Workers’ remittances have become an important source of foreign exchange for some emerging economies even when compared to official development assistance, foreign direct investment or other types of capital flows. While some research suggests that a high inflow of remittances lowers poverty and stimulates economic growth and financial development, other studies suggest that remittances can appreciate the real exchange rate and thereby hurt the competitiveness of the tradeable sector. In this article, we examine the Dutch disease argument for Bangladesh, India, Pakistan and Sri Lanka using a fixed effects model. We are unable to reject the null that there is a statistically significant appreciating effect of remittances on real exchange rate. Since our estimation results show that trade openness causes a depreciation of the real exchange rate, the appreciation effect of the real exchange rate originating from remittance inflows can be made weaker by trade liberalization.

KEYWORDS:

• Dutch disease
• worker remittances
• real exchange rate

JEL CLASSIFICATION:

• F1
• F4
• O1

Notes

¹ In some studies a world (or US) interest rate is included in the model. As capital account convertibility is not allowed in most of these countries, the argument of capital outflows for higher world interest rate is not applicable here. Moreover, the presence of net foreign assets in the model is also capturing a country’s net creditor position originating from higher or lower world interest rates. So we have not included the world interest rate in the model reported in the article (when US interest rates were included they were, as we would expect, insignificant – the other coefficients and SEs are unaffected by the exclusion of this variable).

² All data are available quarterly except (i) the nominal exchanges rates, CPI, exports, imports and also remittance data for Bangladesh and Pakistan, where quarterly averages have been computed from monthly data, and (ii) for Government spending, terms of trade, Foreign aid and remittance data for Sri Lanka, quarterly figures are interpolated from yearly ratios.

³ As a further check of the robustness of the results, we use the remittances to GDP ratio instead of remittances per capita. The results (which may be obtained from the authors) are essentially same as those reported above for remittances per capita.