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Aid and the Dutch Disease in Low-Income Countries

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  • Mwanza Nkusu
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    Abstract

    This paper demonstrates that the Dutch disease need not materialize in low-income countries that can draw on their idle productive capacity to satisfy the aid-induced increased demand. Diagnoses on, and prognoses for, the Dutch disease should take into account country-specific circumstances to avoid ill-advised policies. The paper emphasizes that using public resources inefficiently can be more painful than real exchange rate appreciations, which may not necessarily embody the Dutch disease.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/49.

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    Length: 19
    Date of creation: 01 Mar 2004
    Date of revision:
    Handle: RePEc:imf:imfwpa:04/49

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    Related research

    Keywords: Economic growth; Exchange rate appreciation; Economic models; dutch disease; exchange rate; real exchange rate; foreign exchange; exchange rates; real effective exchange rate; effective exchange rate; macroeconomic policies; fixed exchange rate; dollar exchange rates; nominal exchange rate; exchange rate appreciations; dutch ? disease; foreign exchange reserves; average exchange rates; real exchange rate appreciations; nominal effective exchange rate;

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    1. White, Howard & Wignaraja, Ganeshan, 1992. "Exchange rates, trade liberalization and aid: The Sri Lankan experience," World Development, Elsevier, vol. 20(10), pages 1471-1480, October.
    2. Auty, Richard M., 2001. "The political state and the management of mineral rents in capital-surplus economies: Botswana and Saudi Arabia," Resources Policy, Elsevier, vol. 27(2), pages 77-86, June.
    3. Benjamin, Nancy C. & Devarajan, Shantayanan & Weiner, Robert J., 1989. "The Dutch disease in a developing country : Oil reserves in Cameroon," Journal of Development Economics, Elsevier, vol. 30(1), pages 71-92, January.
    4. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2001. "On the Empirics of Foreign Aid and Growth," EPRU Working Paper Series 03-13, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics, revised Sep 2003.
    5. Isabell Adenauer & Laurence Vagassky, 1998. "Aid and the real exchange rate: Dutch disease effects in African countries," Intereconomics: Review of European Economic Policy, Springer, vol. 33(4), pages 177-185, July.
    6. 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.
    7. Torvik, Ragnar, 2001. "Learning by doing and the Dutch disease," European Economic Review, Elsevier, vol. 45(2), pages 285-306, February.
    8. Nyoni, Timothy S., 1998. "Foreign Aid and Economic Performance in Tanzania," World Development, Elsevier, vol. 26(7), pages 1235-1240, July.
    9. Harvey, Charles, 1992. "Botswana: Is the Economic Miracle Over?," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 1(3), pages 335-68, November.
    10. William Easterly & Ross Levine & David Roodman, 2003. "New Data, New doubts: A Comment on Burnside and Dollar's "Aid, Policies, and Growth" (2000)," NBER Working Papers 9846, National Bureau of Economic Research, Inc.
    11. Corden, W M, 1984. "Booming Sector and Dutch Disease Economics: Survey and Consolidation," Oxford Economic Papers, Oxford University Press, vol. 36(3), pages 359-80, November.
    12. 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.
    13. Lensink, Robert & White, Howard, 1999. "Are there negative returns to aid?," Research Report 99E60, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    14. Henrik Hansen & Finn Tarp, 2000. "Aid effectiveness disputed," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 375-398.
    15. 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.
    16. William Easterly, 2003. "Can Foreign Aid Buy Growth?," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 23-48, Summer.
    17. Collier, Paul, 1999. "Aid 'Dependency': A Critique," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 8(4), pages 528-45, December.
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    Citations

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    Cited by:
    1. Ben Naceur, Sami & Bakardzhieva, Damyana & Kamar, Bassem, 2012. "Disaggregated Capital Flows and Developing Countries’ Competitiveness," World Development, Elsevier, vol. 40(2), pages 223-237.
    2. John Serieux, 2007. "Managing the Exchange Rate Consequences of an MDG-Related Scale-up in HIV/AIDS Financing," Conference Paper 1, International Policy Centre for Inclusive Growth.
    3. Agénor, Pierre-Richard & Bayraktar, Nihal & El Aynaoui, Karim, 2008. "Roads out of poverty? Assessing the links between aid, public investment, growth, and poverty reduction," Journal of Development Economics, Elsevier, vol. 86(2), pages 277-295, June.
    4. Terry McKinley, 2005. "Why is ?The Dutch disease? always a disease? the macroeconomic consequences of scaling up ODA," Working Papers 10, International Policy Centre for Inclusive Growth.
    5. Sanyal, Prabuddha & Babu, Suresh, 2008. "Aid effectiveness and capacity development: Implications for economic growth in developing countries," IFPRI discussion papers 838, International Food Policy Research Institute (IFPRI).
    6. Stephen J. Turnovsky & Serpil Tekin & Valerie Cerra, 2008. "Foreign Aid and Real Exchange Rate Adjustments in a Financially Constrained Dependent Economy," IMF Working Papers 08/204, International Monetary Fund.
    7. Nébié, Gustave Adrien, 2008. "Syndrome Hollandais causé par l’aide : qu’en est-il pour les pays de l’UEMOA ?," Economics Papers from University Paris Dauphine 123456789/4066, Paris Dauphine University.
    8. João Sousa Andrade & António Portugal Duarte, 2013. "The Dutch Disease in the Portuguese Economy," GEMF Working Papers 2013-05, GEMF - Faculdade de Economia, Universidade de Coimbra.
    9. World Bank, 2007. "An Assessment of the Investment Climate in Botswana, Volume 2. Detailed Results and Econometric Analysis," World Bank Other Operational Studies 7747, The World Bank.
    10. Pedro M. G. Martins, 2010. "Do Capital Inflows Hinder Competitiveness? The Real Exchange Rate in Ethiopia," Working Paper Series 1110, Department of Economics, University of Sussex.
    11. ZARZOSA VALDIVIA, Fernando Enrique, 2006. "Income distribution, Dutch disease and real exchange rate movements," Working Papers 2006033, University of Antwerp, Faculty of Applied Economics.
    12. Eun Kwan Choi, 2005. "Infrastructure Aid, Deindustrialization, and Welfare," IMF Working Papers 05/150, International Monetary Fund.
    13. Katerina Kalcheva & Nienke Oomes, 2007. "Diagnosing Dutch Disease," IMF Working Papers 07/102, International Monetary Fund.
    14. Oomes , Nienke & Kalcheva, Katerina, 2007. "Diagnosing Dutch disease: Does Russia have the symptoms?," BOFIT Discussion Papers 7/2007, Bank of Finland, Institute for Economies in Transition.
    15. Mwanza Nkusu, 2004. "Financing Uganda'S Poverty Reduction Strategy," IMF Working Papers 04/170, International Monetary Fund.
    16. Benedicte Vibe Christensen, 2010. "China in Africa: A Macroeconomic Perspective," Working Papers id:3169, eSocialSciences.
    17. Eduardo Haddad & Ana Carolina Giuberti, 2011. "Economic Impacts of Pre-Salt on a Regional Economy: The Case of Espirito Santo, Brazil," ERSA conference papers ersa10p156, European Regional Science Association.
    18. Li, Ying & Rowe, Francis, 2007. "Aid inflows and the real effective exchange rate in Tanzania," Policy Research Working Paper Series 4456, The World Bank.

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