Knowledge spill-over and institutional quality role in controlling Dutch disease: A case of BRICS countries

Abstract

In this seminal work, we introduce the role of institutions and knowledge spillovers in reversing the Dutch disease phenomena and providing a basis for future work. Hence, this study fills the existing literature gap by including institutional quality and knowledge spillovers in testing the Dutch disease hypothesis in Brazil, Russia, India, China, South Africa (BRICS) countries. We analyzed the combined effect of FDI spillovers and remittances inflow on the real effective exchange rate from 1989 to 2019. There is a cointegration relationship among the variables in all aggregate sample models and all the BRICS country's cross-sections. We find that knowledge spillover and institutional quality are important factors contributing to the appreciation of the real effective exchange rate in BRICS countries. This study suggests that for reversing Dutch disease phenomena, BRICS countries need to improve their institutions regarding policy implications. Quality institutions will facilitate remittances to be absorbed into investment activities. Hence, the development of institutions will bring more significant economic growth in the short-run and the long run.