Migrants' Remittances and the Dutch Disease Phenomenon in Developing Countries

Lela KANKADZE

Master's thesis

Abstract:

Along with the rising importance of remittances as the major source of external financing for low- and middle-income countries, the concern of its macroeconomic consequences has also increased over the last two decades. As economic theory suggests, remittances are positively correlated with the real exchange rate (RER) appreciation and the consequent loss of external competitiveness, leading to Dutch disease effects in recipient countries. This thesis focuses on the case of Georgia, a small open economy with high remittances-to-GDP ratio, and checks whether Georgia's RER has appreciated as a result of remittance inflows, consequently harming the external competitiveness. For this purpose, the research employs the Johansen cointegration and Vector Error Correction Model (VECM) estimation technique for annual data from 1997 to 2018. The main finding from both short- and long-run models suggests that remittances have no significant impact on the RER, thus rejecting the remittance-induced Dutch disease hypothesis for Georgia. This finding is further supported by Impulse Response Functions (IRF). On the other hand, other international transfers, FDI and ODA jointly depreciate the REER in the short run, but have a reverse impact in the long run, appreciating the domestic currency and possibly contributing to the deterioration of Georgia's trade competitiveness.

Abstract:

Along with the rising importance of remittances as the major source of external financing for low- and middle-income countries, the concern of its macroeconomic consequences has also increased over the last two decades. As economic theory suggests, remittances are positively correlated with the real exchange rate (RER) appreciation and the consequent loss of external competitiveness, leading to Dutch disease effects in recipient countries. This thesis focuses on the case of Georgia, a small open economy with high remittances-to-GDP ratio, and checks whether Georgia's RER has appreciated as a result of remittance inflows, consequently harming the external competitiveness. For this purpose, the research employs the Johansen cointegration and Vector Error Correction Model (VECM) estimation technique for annual data from 1997 to 2018. The main finding from both short- and long-run models suggests that remittances have no significant impact on the RER, thus rejecting the remittance-induced Dutch disease hypothesis for Georgia. This finding is further supported by Impulse Response Functions (IRF). On the other hand, other international transfers, FDI and ODA jointly depreciate the REER in the short run, but have a reverse impact in the long run, appreciating the domestic currency and possibly contributing to the deterioration of Georgia's trade competitiveness.

Keywords

Remittances, Dutch disease, Georgia, RER, Cointegration, VECM

Language used: English

Date on which the thesis was submitted / produced: 8. 6. 2020

Thesis defence

• Supervisor: prof. Gianni Vaggi

Palacký University Olomouc

Faculty of Science

Master programme / field:
Geography / International Development Studies