Testing Dutch disease syndrome via foreign direct investment: A case for Mauritius

Abstract

The primary linkage of Dutch Disease is based on large influx FDI leading to the appreciation of the real effective exchange rate, together affecting a country’s export competitiveness. The existence of a Dutch Disease syndrome is tested in the Mauritian economy by using annual time series data sourced from official foundations from 1980 to 2019. We captured the Dutch Disease syndrome through 2 main effects namely through i) the REER appreciation due to FDI and ii) a decline in export’s competitiveness. After investigation, using a Vector Error Correction Model, it is observed that Mauritius has not experienced such a disease with respect to the arrival of FDI because the government and local firms were successful in implementing right and stable policies.