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Aid, Real Exchange Rate Misalignment and Economic Performance in Sub-Saharan Africa

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Author Info

  • Ibrahim A. Elbadawi
  • Linda Kaltani
  • Raimundo Soto

    ()
    (Instituto de Economía. Pontificia Universidad Católica de Chile.)

Abstract

Generating sustained growth in Sub-Saharan Africa is one of the most pressing challenges in global development. As the region needs foreign assistance to jump start its development, foreign aid becomes crucial. However, aid booms can also lead to exchange rate overvaluation curtailing exports and growth. This paper provides new evidence on the impact of aid and overvaluation on growth and exports using a sample of 83 countries from 1970 to 2004. We find that aid fosters growth (with decreasing returns) but induces overvaluation. Overvaluation reduces growth but the effect is ameliorated by financial development. Finally, we find new evidence on the negative impact of overvaluation on export diversification and sophistication.

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Bibliographic Info

Paper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 368.

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Date of creation: 2009
Date of revision:
Handle: RePEc:ioe:doctra:368

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Keywords: Africa; Sub Sahara; real exchange rate; misalignment; exports; growth;

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References

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  1. Paul Collier & Marcel Fafchamps & Francis Teal & Stefan Dercon, 2002. "Do African Manufacturing Firms Learn from Exporting?," Economics Series Working Papers WPS/2002-09, University of Oxford, Department of Economics.
  2. Maeso-Fernandez, Francisco & Osbat, Chiara & Schnatz, Bernd, 2001. "Determinants of the euro real effective exchange rate: a BEER/PEER approach," Working Paper Series 0085, European Central Bank.
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Cited by:
  1. Cécile Couharde & Issiaka Coulibaly & Olivier Damette, 2011. "Misalignments and Dynamics of Real Exchange Rates in the CFA Franc Zone," EconomiX Working Papers 2011-28, University of Paris West - Nanterre la Défense, EconomiX.
  2. Coulibaly, Issiaka & Gnimassoun, Blaise, 2013. "Optimality of a monetary union: New evidence from exchange rate misalignments in West Africa," Economic Modelling, Elsevier, vol. 32(C), pages 463-482.
  3. World Bank, 2012. "World Development Report 2013," World Bank Publications, The World Bank, number 11843, July.
  4. Ilham Haouas & Raimundo Soto, 2012. "Has the UAE Escaped the Oil Curse?," Documentos de Trabajo 412, Instituto de Economia. Pontificia Universidad Católica de Chile..

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