Dutch Disease in Central and Eastern European Countries

Bulgaria, Croatia, Estonia, Latvia, Lithuania, Hungary, Poland, Czech Republic, Romania, Slovenia, and Slovakia have all benefited from an increase of European Union capital transfers of funds since the demand for European integration. At the same time, foreign direct investments have risen, mainly due to the liberalisation of capital movements. The effects of those funds and the reduction of financial costs can be considered as analogous to the phenomenon known as Dutch Disease. That is to say, the inflow of financial transfers is also considered a curse. In order to eliminate this curse we must take into account the two effects associated with Dutch Disease: the ‘spending effect’ and the ‘resource movement effect’. Public policies have not been appropriate and have not prevented the real exchange rate appreciation, thereby contributing to a poor performance in terms of competitiveness and economic growth. After a descriptive analysis of some variables, we estimate a set of equations that take account of the direct and indirect effects of European Union funds and financial costs on the economy where the effects on the real exchange rate play the major role.