Dutch disease in aid-recipient countries: are there medicines to avoid an outbreak?

The idea of scaling up aid to developing countries has increased fears of “Dutch Disease” in the donor community and recipient countries. Through its impact on inflation and the exchange-rate, aid could slow down growth and human development, undermining the aims of donors and recipients. By using the basic model of Dutch Disease, adjusting it to the circumstance of developing countries and taking a medium-term view, we explain how it is possible to avoid Dutch Disease. Important factors determining the impact seem to be: the spending pattern of aid, the amount of imports financed with aid and the coordination between the fiscal and monetary authorities. As the IMF is one of the most important participants in the discussion around this topic, we also clarify the specific terms this institution uses to discuss this sort of topics. The paper ends with referring to the fact that understanding the problem is one thing, taking these economic decisions on a political level may in certain countries form another problem.