International transfers 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 eight South Asian countries for the period of 1975-2013. An increase in per capita remittances erodes international competitiveness by appreciating the real effective exchange rate, also leading to a fall in traded to non-traded goods production ratio in the economy; hardly any statistically significant impact of foreign aid on these variables is detected. These point to premature deindustrialization consequences of large remittance inflows that could slow down structural transformation towards manufacturing. Although remittances and foreign aid may have a significant impact on poverty alleviation in this region, policy planners should pay attention to more effective utilization of remittances and foreign aid.