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Foreign Aid, the Real Exchange Rate, and Economic Growth in the Aftermath of Civil Wars

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Author Info

  • Ibrahim A. Elbadawi
  • Linda Kaltani
  • Klaus Schmidt-Hebbel

Abstract

Foreign aid, the real exchange rate (RER), and economic growth are three key variables that shape the aftermath of civil wars in many developing countries. Panel estimations drawn from a sample of 39 conflict and 44 nonconflict countries between 1970 and 2004 indicate that although postconflict countries receive larger aid flows and exhibit moderate RER overvaluation after peace is attained, overvaluation cannot be traced to aid. Yet foreign aid is among the significant determinants of the equilibrium RER. Aid is also an important determinant of economic growth, particularly after peace is reached. Aid exhibits decreasing returns, however, and interacts negatively with RER overvaluation. RER overvaluation reduces growth, but this effect is ameliorated by financial development. Postconflict policies should therefore aim to use aid prudently, avoid RER misalignment, and support financial and capital market development to achieve high and stable growth in the aftermath of war and beyond. Copyright The Author 2008. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development / the world bank . All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org, Oxford University Press.

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Bibliographic Info

Article provided by World Bank Group in its journal The World Bank Economic Review.

Volume (Year): 22 (2008)
Issue (Month): 1 (February)
Pages: 113-140

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Handle: RePEc:oup:wbecrv:v:22:y:2008:i:1:p:113-140

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Cited by:
  1. Anke Weber & Chunfang Yang, 2011. "Armenia," IMF Working Papers 11/20, International Monetary Fund.
  2. Antonio David & Fabiano Rodrigues Bastos & Marshall Mills, 2011. "Post-Conflict Recovery," IMF Working Papers 11/149, International Monetary Fund.
  3. Marta C. N. Simões, 2011. "Education Composition and Growth: A Pooled Mean Group Analysis of OECD Countries," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(4), pages 455-471, December.
  4. Ben Naceur, Sami & Bakardzhieva, Damyana & Kamar, Bassem, 2012. "Disaggregated Capital Flows and Developing Countries’ Competitiveness," World Development, Elsevier, vol. 40(2), pages 223-237.

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