An inquiry into remittances, real exchange rate behavior, and sectoral growth in the Philippines: the Dutch disease diagnosis
Date
2008-03
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Abstract
The windfall of resources coming into the Philippines has caused speculations that the country has contracted the symptoms of the so-called Dutch disease, a condition where a resource boom harms the economy by making its industries less competitive. This paper attempts to diagnose whether the Philippines is suffering from the said phenomenon. Using the three-stage least squares estimation method, we assess the behavior of the real exchange rate in relation to increases in capital flows and determine its subsequent effects on the different sectors of the economy. The econometric results of the paper confirm the theories that inflows such as remittances and ODA cause real appreciation. Results also confirm the relationship between the exchange rate and the growth in the non-tradable sector. However, we found that with a real appreciation, the tradable sector experienced growth instead of a decline. We thus end with the conclusion that the Philippines is not suffering from the Dutch disease, although several symptoms are already present. Nonetheless, measures should be taken by the government to prevent the Dutch disease from fully taking effect.
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Keywords
Remittances, Exchange rates, Sectoral growth, Dutch disease, Philippine remittances