Foreign Capital Inflows and Macroeconomic indicators: Are Developing Economies in the Trap of the Dutch Disease Hypothesis?

Abstract

The Dutch disease phenomenon has been related to foreign inflows into emerging economies in particular, including foreign aid, migrant’s remittances, and foreign direct investment. A surge in these inflows is expected to yield a rise in the real exchange rate. Recipient countries have seen a decline in industry as a result of the rise in the non-marketable sector and the slump in the marketable sector. This study empirically investigates the mechanisms of real exchange rate adjustments to migrant remittances, ODA, and FDI toward emerging economies. For the analysis covering the years 2001–2020, dynamic panel data approaches, difference GMM and system GMM, are used to investigate the incidence of Dutch Disease in 84 emerging economies. Numerous econometric studies have shown that Dutch Disease does exist in emerging economies. The Dutch Disease theory is supported by an expanded study that has included the empirical analysis of both industrial (marketable) and service (nonmarketable) sectors.