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Aid, Dutch disease, and manufacturing growth

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  • Rajan, Raghuram G.
  • Subramanian, Arvind

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.

Suggested Citation

  • Rajan, Raghuram G. & Subramanian, Arvind, 2011. "Aid, Dutch disease, and manufacturing growth," Journal of Development Economics, Elsevier, vol. 94(1), pages 106-118, January.
  • Handle: RePEc:eee:deveco:v:94:y:2011:i:1:p:106-118
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    Keywords

    Aid Dutch disease Exports Manufacturing Exchange rate;

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