Does official development assistance (ODA) cause the Dutch disease in developing countries

Abstract

Purpose

This paper aims to investigate whether official development assistance (ODA) inflows to developing countries (lower-middle and low income) can cause the symptoms of Dutch disease or not.

Design/methodology/approach

This study applies the methodology of dynamic panel data estimation with a one-step system generalized methods of moment (GMM) for the sample of 59 developing countries from 2001 to 2019.

Findings

The results indicate that ODA (as a percentage of gross domestic product (GDP)) rises by 1%, the real effective exchange rate (REER) appreciates by 0.252%. This finding reveals that these selected developing countries have faced the symptoms of Dutch disease. The countries with the higher ODA ratio have a higher effect of the Dutch disease, and the managed floating exchange rate regime is the lowest impacted, when compared to the fixed and flexible exchange rate.

Practical implications

The selected countries are recommended to use ODA inflows right and efficiently. These ODA inflows should be invested in productive sectors or support for production rather than in consumption. The managed float exchange rate regime is applied to reduce the symptom of Dutch disease for the selected countries. The good cooperation of monetary and fiscal policies is important to absorb the huge ODA inflow and sterilize the adverse effects of the disease.

Originality/value

The paper contributes to the literature and empirical of the Dutch disease. An adverse effect of the huge ODA inflow to the developing countries appreciated of the real exchange rate and caused the symptom of the dutch disease.

Peer review

The peer review history for this article is available at: https://publons.com/publon/10.1108/IJSE-12-2022-0777

Citation

Nguyen Phuc, H., Nguyen Viet, D., Le Thi Kim, X., Nguyen Van, C. and Nguyen Van, M. (2024), "Does official development assistance (ODA) cause the Dutch disease in developing countries", International Journal of Social Economics, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJSE-12-2022-0777