Do Remittances Cause Dutch Disease in Resource Poor Countries of Central Asia?

Dutch disease or resource curse is an adverse effect of high dependence on exports of natural resources, such as oil and gas, or other inflows, such as remittances or foreign aid. Dutch disease is known to lead to appreciation of the real exchange rate, decline in tradable sectors (mostly industry and agriculture) and surge in non-tradable sectors (services). This means unfavourable development of an economy where retail trade or construction would grow, but production sectors would be atrophied. Such economies become vulnerable and may suffer if inflow of currency from natural resources or remittances dries out. This study tests whether large inflow of foreign currency coming to Kyrgyzstan and Tajikistan from labour migrants has caused Dutch disease as described by Corden (1984) and Corden and Neary (1982): appreciation of the real exchange rate, decline in tradable sectors and surge in non-tradable sectors. Furthermore, the paper takes one step further and looks at this phenomenon from the point of view of importing Dutch disease from resource-rich countries to resource-poor countries. Results show that symptoms of Dutch disease are present in Kyrgyzstan and Tajikistan. There is an evidence of deindustrialisation, higher growth rates and larger share of service sector in GDP. In addition, high oil prices showed strong appreciation effect on local currencies of Kyrgyzstan and Tajikistan indicating the transfer of Dutch disease from resource-rich Russia.