A few days ago I created a post about the effect of remittances on economic growth where it could be either positive or negative depending on how it could improve the consumption, investment and other economic activities (improving) or how it could impact or improve the exchange rate which could result to the *Dutch disease effects which could worsen the net export and GDP. Today, I would like to discuss more about the Dutch disease as there is something I am so curious about.
So, what is Dutch Disease?
It is actually the negative impact on an economy of anything that gives rise to a sharp inflow of foreign currency.
In the last post, I mentioned that remittance could result to the disease as it could increase the demand of home country currency and resulting to appreciation of the exchange rate. That statement is a little bit confusing.
But here is how it actually works:
- Remittances cause the inflows of foreign currency.
- The rise of foreign currency inflows would increase the supply of that currency and leads to the cheaper price relative to the domestic currency.
- Indirectly it could impact (risen) the demand of domestic currency as the remittance recipients would want to convert the foreign currencies to domestic currency to use them domestically.
- These, would cause the appreciation of exchange rate.
- Domestic goods would become more expensive to the outside world and less competitive in the export market.
- Meanwhile, the import products become cheaper to the residents.
- The reduction of export values and improvement of imports would lower the trade balance and thus could worsen the GDP and economic growth.
From the last post I also mentioned how the blockchain technology could make the transfers remittance easier. So here is what I am curious about; would the blockchain and cryptocurrencies also could bring the Dutch disease effects?
I am not so familiar with the impact of cryptocurrencies but I know there are so much flows of the exchanges here. I am confuse on how it would actually work. If you are an expert to this or if have any idea, you can share your thoughts in the comment.