Foreign Aid and Dutch Disease: The Case of Vietnam

Abstract

Abstract This study examines whether foreign aid from 1986 to 2019 caused the Dutch disease effect in Vietnam using a VAR model and Granger causality test. In this context, “Dutch disease” refers to the weakening of manufacturing processes as a consequence of the appreciation of a local currency due to capital inflow. Since foreign aid is considered a type of capital inflow, it is among the reasons for the appreciation of a local currency, which may offset the impact of foreign aid on economic growth. Although Vietnam experienced rapid economic growth, along with a large amount of foreign aid and appreciation in the real exchange rate, after Doi Moi (economic reform) in 1986, few studies have yet been conducted. The estimation results show that foreign aid does not cause an appreciation of the local currency in Vietnam. Based on this result, the Dutch disease did not occur due to foreign aid in Vietnam. JEL classification numbers: F35, O53. Keywords: Foreign Aid, Dutch Disease, Vietnam.