Aid, Remittances, the Dutch Disease, Refugees, and Kenya

In this paper we show that an important determinant of a foreign transfer generating a Dutch disease effect is the income of the recipient. The marginal propensity to consume luxury services is larger for wealthier recipients who are more likely to receive the benefits of foreign aid than they are to receive remittances. In a three good model of international trade with production we show that foreign aid can generate a Dutch disease and remittances can foster economic growth. We empirically verify these hypotheses with data from two panels of data covering the years 1980-2009. The data for Kenya, with its large population of displaced person in refugee camps, however, fails to support these propositions. The Kenyan data suggests that certain restrictions on refugees reduce the beneficial effect of their received remittances on the host economy.