Dutch Disease in a Developing Country: The Case of Foreign Capital Inflows to Sri Lanka

Abstract

Several attempts have been made in recent years to investigate the Dutch disease type effects arising from windfall gains in Developing countries (LDCs) by using the traditional Australian Dutch disease model. This paper is another such attempt to examine the Dutch disease type consequences of foreign capital inflows to Sri Lanka within an ceonomy-wide framework. The results of our study show that this traditional model does not adequately address the impact of windfall gains on the economic structure of LDCs. Therefore, some modifications to the traditional model are needed to explain Dutch disease type consequences in these countries.