Remittance, Foreign Aid Inflows and Dutch Disease : Evidence from South Asian Countries

We investigate the Dutch Disease impact of migrant‘s remittances and foreign aid using a yearly panel data of five South Asian countries for the period of 1975-2013. We employ two separate regressions to examine the spending effect and resource movement effect of the transfer. The findings reveal that remittances have Dutch Disease impact through both of the effects, whereas no statistically significant impact of foreign aid is detected. An increase in per capita remittances erodes international competitiveness in the way of appreciating real effective exchange rate and at the same time leads to fall in traded to non-traded ratio, thus impacting on the traded sector. The analysis shows that South Asian countries have been experiencing premature deindustrialization and large remittance inflows might have been one of the main causes of it, since the inflows may slow down the structural transformation towards the manufacturing sector. Although remittances and foreign aid may have significant impact on poverty alleviation in this region, policy planners should pay much heed to effective utilization of remittances and foreign aid; otherwise the countries may be caught in the low development trap.