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Aid, Dutch Disease, and Manufacturing Growth

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  • Raghuram G. Rajan
  • Arvind Subramanian

Abstract

We examine the effects of aid on the growth of manufacturing, using a methodology that exploits the variation within countries and across manufacturing sectors, and corrects for possible reverse causality. We find that aid inflows have systematic adverse effects on a country’s competitiveness, as reflected in the lower relative growth rate of exportable industries. We provide some evidence suggesting that the channel for these effects is the real exchange rate appreciation caused by aid inflows. We conjecture that this may explain, in part, why it is hard to find robust evidence that foreign aid helps countries grow.

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Bibliographic Info

Paper provided by Center for Global Development in its series Working Papers with number 196.

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Length: 39 pages
Date of creation: Dec 2009
Date of revision:
Handle: RePEc:cgd:wpaper:196

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Web page: http://www.cgdev.org

Related research

Keywords: manufacturing; economic development; dutch disease; cgd; center for global development;

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References

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  1. Raghuram G. Rajan & Arvind Subramanian, 2008. "Aid and Growth: What Does the Cross-Country Evidence Really Show?," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 643-665, November.
  2. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2004. "On The Empirics of Foreign Aid and Growth," Economic Journal, Royal Economic Society, vol. 114(496), pages F191-F216, 06.
  3. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, vol. 40(2), pages 289-329, February.
  4. Younger, Stephen D., 1992. "Aid and the Dutch disease: Macroeconomic management when everybody loves you," World Development, Elsevier, vol. 20(11), pages 1587-1597, November.
  5. Jeffrey B. Nugent & Makoto Yano, 1999. "Aid, Nontraded Goods, and the Transfer Paradox in Small Countries," American Economic Review, American Economic Association, vol. 89(3), pages 431-449, June.
  6. van Wijnbergen, Sweder, 1985. "Aid, Export Promotion and the Real Exchange Rate: An African Dilemma?," CEPR Discussion Papers 88, C.E.P.R. Discussion Papers.
  7. Michael A. Clemens & Steven Radelet & Rikhil Bhavnani, 2004. "Counting chickens when they hatch: The short-term effect of aid on growth," International Finance 0407010, EconWPA.
  8. Raghuram G. Rajan & Luigi Zingales, 1996. "Financial Dependence and Growth," NBER Working Papers 5758, National Bureau of Economic Research, Inc.
  9. Alesina, Alberto & Weder, Beatrice, 2002. "Do Corrupt Governments Receive Less Foreign Aid?," Scholarly Articles 4553011, Harvard University Department of Economics.
  10. Benjamin F. Jones & Benjamin A. Olken, 2008. "The Anatomy of Start-Stop Growth," The Review of Economics and Statistics, MIT Press, vol. 90(3), pages 582-587, August.
  11. Collier, Paul & Dollar, David, 1999. "Aid allocation and poverty reduction," Policy Research Working Paper Series 2041, The World Bank.
  12. Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers 0151, National Bureau of Economic Research, Inc.
  13. Timothy D. Lane & Leslie Lipschitz & Cristina Arellano & Ales Bulir, 2005. "The Dynamic Implications of Foreign Aid and its Variability," IMF Working Papers 05/119, International Monetary Fund.
  14. William Easterly, 2003. "Can Foreign Aid Buy Growth?," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 23-48, Summer.
  15. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April.
  16. Thierry Tressel & Alessandro Prati, 2006. "Aid Volatility and Dutch Disease," IMF Working Papers 06/145, International Monetary Fund.
  17. Elbadawi, Ibrahim A, 1999. "External Aid: Help or Hindrance to Export Orientation in Africa?," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 8(4), pages 578-616, December.
  18. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
  19. William Easterly & Ross Levine, 2002. "Tropics, Germs, and Crops: How Endowments Influence Economic Development," NBER Working Papers 9106, National Bureau of Economic Research, Inc.
  20. Timothy D. Lane & Ales Bulir, 2002. "Aid and Fiscal Management," IMF Working Papers 02/112, International Monetary Fund.
  21. Torvik, Ragnar, 2001. "Learning by doing and the Dutch disease," European Economic Review, Elsevier, vol. 45(2), pages 285-306, February.
  22. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
  23. Wijnbergen, Sweder Van, 1986. "Macroeconomic aspects of the effectiveness of foreign aid: On the two-gap model, home goods disequilibrium and real exchange rate misalignment," Journal of International Economics, Elsevier, vol. 21(1-2), pages 123-136, August.
  24. Barry P. Bosworth & Susan M. Collins, 2003. "The Empirics of Growth: An Update," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2), pages 113-206.
  25. Nyoni, Timothy S., 1998. "Foreign Aid and Economic Performance in Tanzania," World Development, Elsevier, vol. 26(7), pages 1235-1240, July.
  26. Vos, Rob, 1998. "Aid Flows and "Dutch Disease" in a General Equilibrium Framework for Pakistan," Journal of Policy Modeling, Elsevier, vol. 20(1), pages 77-109, February.
  27. Svensson, Jakob, 2003. "Why conditional aid does not work and what can be done about it?," Journal of Development Economics, Elsevier, vol. 70(2), pages 381-402, April.
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  1. Efficacité de l’Aide publique au développement
    by marinferry@hotmail.fr (Marin Ferry) in BS Initiative on 2013-11-26 09:36:52
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