[Podcast] “Dutch Disease” in Remittances and the Case of Vietnam

4 November, 2024

Keywords: remittances, market, bank, Dutch Disease

Depending on each case with the intrinsic characteristics of the national economy, the direction of remittance flows and the absorption capacity of the economy, the impact of remittances seems to be different.

The importance of remittances and unexpected downsides

Remittances have increased rapidly in recent decades and played an important role in low- and middle-income countries (for example: Vietnam – classified as a lower middle-income country – according to the World Bank). In accordance with the data from the World Bank, remittances (as a percentage of GDP) received in low- and middle-income countries reached more than 1.5% of GDP, which is higher than that of the net foreign direct investment (1.4% of GDP). Economic studies have drawn some positive and negative impacts of remittances. Remittances are considered an external source of finance for recipient countries (especially low-income and developing countries), helping to reduce capital barriers for the economy and to promote investment and consumption. On the other hand, remittances lead to some negative impacts. The most specific problem is the “Dutch disease”. Accordingly, remittance flows can reduce labor supply in the market (because remittance recipients may reduce their demand for jobs) while the demand for non-export goods (temporarily called domestic goods) increases. As a result, the labor market has shifted in human resources from the export production sector to the non-export production sector, leading to a decrease in export competitiveness because of the increased labor costs. In addition, the inflow of remittances (if considered as a capital flow) can increase the value of money (real exchange rate), reducing the competitiveness of exports. However, the previous studies have not reached a final conclusion on the negative or positive impact of remittances on the economy yet. Studies indicate that, depending on each case with the intrinsic characteristics of the national economy, the direction of remittance flows and the absorption capacity of the economy, the impact of remittances, all of which seem to be different. In the case of Vietnam, some studies illustrate that remittances have certain positive impacts listed as helping to increase household assets and economic growth; on the other hand, other studies find more negative results. One important issue is the direction of remittance flows into the economy. Studies present that the worry regarding the case of Vietnam is that remittances do not seem to go into production; actually, they are mainly used for real estate investment, debt repayment, savings, and consumption for durable goods. If this continues for a long time, it may not only lead to the risk of negative impacts of the “Dutch disease” problem but also other problems listed as the overheating of the real estate market. Therefore, this is an issue that policymakers must pay attention to and have appropriate policies.

Recommendations

In terms of macro policy, studies demonstrate that there are no one-size-fits-all policies. The author group would like to give some suggestions for consideration as follows:

First, policymakers, especially the State Bank of Vietnam (SBV), need to closely monitor the development of remittances and their relationship with the real exchange rate of USD/VND. The impact of remittances on the real exchange rate is a possibility and can reduce the competitiveness of Vietnamese exports. Therefore, the SBV needs to operate a flexible monetary policy so as not to cause the real USD/VND exchange rate to change too suddenly or be held down for too long.

In terms of the government and local authorities side, organizations listed as the International Monetary Fund (IMF) encourage those countries that receive large amounts of remittances to invest in public and institutional infrastructure.

In terms of public infrastructure, investment in critical infrastructure should be focused on facilitating economic activities, especially new ones through entrepreneurship. Reducing costs listed as those on transportation is essential to aim remittances at productive activities rather than consumption.

From an institutional perspective, it is important to establish that remittances should not be taxed because they can help reduce poverty and support low-income households. However, institutional improvements, especially business conditions, are needed so that remittance recipients can use this cash flow for production and business activities.

An issue that also needs to be considered is investment in education, not only for domestic workers but also for remittance recipients or returning workers. Training in appropriate knowledge and skills for them to optimally use this capital for production and business is necessary. Concurrently, improving workers’ knowledge and skills is one way to indirectly increase the competitiveness of exports in case they are negatively affected by remittances.

Finally, it is necessary to establish a policy perspective that remittances can be considered an important resource for economic development but not a long-term resource because this can lead to a spiral of relying on remittances for additional income. People will increasingly depend on remittance income and seek ways to migrate/export labor, resulting in increased dependence.

The article was published on Saigon Economic Magazine.

Author group: Dr. Nguyen Phuc Canh – University of Economics Ho Chi Minh City (UEH).

This article is part of the series spreading research and applied knowledge from UEH with the message “Research Contribution For All”. UEH cordially invites readers to wait for the next UEH Research Insights issue.

News, photos: Author group, UEH Department of Communications and Partnerships