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Foreign aid and export diversification in developing countries

  • Jonathan Munemo

This paper analyzes the effect of foreign aid on export diversification for a sample of developing countries while controlling for the effects of other factors that determine export diversification. We find that foreign aid not exceeding 20% of a country's GDP significantly promotes export diversification, while foreign aid in excess of 20% of GDP significantly impedes export diversification. The latter result corroborates evidence from related literature, which has shown that foreign aid can have an anti-export bias due to a Dutch disease effect. However, our results show that aid as a percent of GDP is below 20% in most low-income countries. This implies that in many low-income countries, varying amounts of additional aid can be used to enhance export diversification without causing a Dutch disease effect. As in the previous literature, we find that the level of development, infrastructure, transactions costs, and natural resources significantly affect export diversification. Our results are robust to the use of two different export diversification measures and different sub-samples.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/09638199.2011.538970
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Article provided by Taylor & Francis Journals in its journal The Journal of International Trade & Economic Development.

Volume (Year): 20 (2011)
Issue (Month): 3 ()
Pages: 339-355

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Handle: RePEc:taf:jitecd:v:20:y:2011:i:3:p:339-355
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  1. Federico Bonaglia & Kiichiro Fukasaku, 2003. "Export Diversification in Low-Income Countries: An International Challenge After Doha," OECD Development Centre Working Papers 209, OECD Publishing.
  2. Subhayu Bandyopadhyay & Howard J. Wall, 2006. "The determinants of aid in the post-cold war era," Working Papers 2006-021, Federal Reserve Bank of St. Louis.
  3. Jens Andersson & Federico Bonaglia & Kiichiro Fukasaku & Caroline Lesser, 2005. "Trade and Structural Adjustment Policies in Selected Developing Countries," OECD Development Centre Working Papers 245, OECD Publishing.
  4. Wood, Adrian & Mayer, Jorg, 2001. "Africa's Export Structure in a Comparative Perspective," Cambridge Journal of Economics, Oxford University Press, vol. 25(3), pages 369-94, May.
  5. Jan Willem Gunning & Paul Collier, 1999. "Explaining African Economic Performance," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 64-111, March.
  6. Alesina, Alberto & Dollar, David, 2000. " Who Gives Foreign Aid to Whom and Why?," Journal of Economic Growth, Springer, vol. 5(1), pages 33-63, March.
  7. Wacziarg, Romain & Imbs, Jean, 2000. "Stages of Diversification," Research Papers 1653, Stanford University, Graduate School of Business.
  8. Raghuram G. Rajan & Arvind Subramanian, 2005. "What Undermines Aid's Impact on Growth?," NBER Working Papers 11657, National Bureau of Economic Research, Inc.
  9. Rodrik, Dani, 1995. "Why is there Multilateral Lending?," CEPR Discussion Papers 1207, C.E.P.R. Discussion Papers.
  10. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
  11. 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.
  12. Habiyaremye, Alexis & Ziesemer, Thomas, 2006. "Absorptive Capacity and Export Diversification in Sub-Saharan African Countries," MERIT Working Papers 030, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  13. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, vol. 40(2), pages 289-329, February.
  14. Osakwe, Patrick N., 2007. "Foreign Aid, Resources and Export Diversification in Africa: A New Test of Existing Theories," MPRA Paper 2228, University Library of Munich, Germany.
  15. 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.
  16. Jonathan Munemo & Subhayu Bandyopadhyay & Arabinda Basistha, 2007. "Foreign aid and export performance: a panel data analysis of developing countries," Working Papers 2007-023, Federal Reserve Bank of St. Louis.
  17. 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.
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