Workers' remittances and Dutch Disease in Bangladesh

Abstract

Workers' remittance is one of the major sources of foreign exchange earnings for Bangladesh in recent years. It accounted for 12% of GDP in 2009 and has colossal socio-economic implications for the country. However, the inflows of foreign exchange earnings can exert adverse effects on the international competitiveness of an economy as postulated by the Dutch Disease theory. Using Johansen Cointegration and Vector Error Correction Model and annual data from 1971 to 2008, this paper investigates the effects of remittances on the external trade competitiveness as measured by the movements of real exchange rate of the country. The results of the study suggest that the influx of workers' remittances significantly appreciates the real exchange rate and deteriorates the external trade competitiveness of Bangladesh. While increased terms of trade indicates similar adverse effects, openness in goods and capital markets and nominal devaluation improve the trade competitiveness of the country. Therefore, greater trade openness and channelling remittances to the priority investment projects can be powerful policy devices to improve the external competitiveness and avert 'Dutch Disease' in Bangladesh.

An Empirical Investigation of Real Exchange Rate Responses to Foreign Currency Inflows: Revisiting the Dutch Disease Phenomenon in South Asia

“…International REMIT accounts for the foreign currencies remitted by the expatriate workers and excludes the corresponding outflows. A negative relationship between REMIT flowing into the home economy of the emigrant and the RER of the recipient economy can also be expected as per the DD hypothesis (Bourdet & Falck, 2006;Chowdhury & Rabbi, 2014).…”

Remittances and Energy Consumption: Evidence from Morocco

“…However, macro and micro level empirical studies supporting the pessimistic view suggest that remittances impede economic growth through the Dutch Disease effect (Lartey et al., ); lower tax revenues (Ziesemer, ); reduce the labour supply (Airola, ), fertility rate (Zhunio et al., ), and agricultural activities (Gray and Bilsborrow, ); lead to public moral hazard (Ebeke, ); decrease external trade competitiveness (Chowdhury and Rabbi, ); increase corruption (Berdiev et al., ); appreciate national currency (Lartey et al., ) and stimulate inflation (Jansen et al., ). Consequently, recent macro and micro level empirical studies provide mixed results on whether remittances contribute to or slow economic development.…”

Households’ characteristics and the modes of remittances in Bangladesh

“…Sikder and Ballis (2013) using an ethnographic study of 36 migrant households across three rural villages in Bangladesh, studied the roles of remittances in shaping the life circumstances of rural migrant households in Bangladesh. Chowdhury and Rabbi (2014) using the annual data from 1971 to 2008 studied the relationship between workers remittances and real exchange rate in Bangladesh and showed that influxes of workers' remittances significantly appreciates the real exchange rate and deteriorates the external trade competitiveness. Hatemi-J and Salah Uddin (2014) studied the relationship between poverty reduction and remittances and found that the causality nexus between them is bi-directional.…”