Aid and Dutch Disease: Evidence from Moroccan and Tunisian time-series data

We examine aid-induced Dutch Disease - after controlling for the effects of remittances and FDI flows - in the context of two North African countries, Morocco and Tunisia. We do so by performing a multivariate time series analysis of aggregated annual data over the period 1980-2009. Aid causes real exchange rate appreciation in the case of Morocco, especially in the long run, but has no effect on the real exchange rate in the case of Tunisia. Remittances cause a real depreciation in Tunisia but have no significant effect in Morocco, while FDI does not have an effect on the real exchange rate in either country. We discuss the policy implications of the main results: aid and other types of foreign exchange inflow have the potential to cause Dutch Disease but this is not automatic in the way suggested by the strongest critiques of aid. Morocco and Tunisia provide contrasting outcomes. Our results confirm the importance of the macroeconomic framework in which aid is provided, and the key role for infrastructure and other supply-side improvements to the final real-economy impact of aid and other inflows.