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Aid, Exports, and Growth: A Time-Series Perspective on the Dutch Disease Hypothesis

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  • Joong Shik Kang
  • Alessandro Prati
  • Alessandro Rebucci

    ()

Abstract

The available evidence on the effects of aid on growth is notoriously mixed. We use a novel empirical methodology, a heterogeneous panel vector-autoregression model identified through factor analysis, to study the dynamic response of exports, imports, and per capita GDP growth to a "global" aid shock (the common component of individual country aid-to-GDP ratios). We find that the estimated cumulative resposive of exports and per capita GDP growth to a global aid shock are strongly positively correlated, and both responses are inversely related to exchange rate overvaluation measures. We interpret this evidence as consistent with the Dutch disease hypothesis. However, we also find that, in countries with less overvalued real exchange rates, exports and per capita GDP growth respond positively to a global aid shock. This evidence suggests that preventing exchange rate overvaluations may allow aid-receiving countries to avoid the Dutch disease.

Suggested Citation

  • Joong Shik Kang & Alessandro Prati & Alessandro Rebucci, 2010. "Aid, Exports, and Growth: A Time-Series Perspective on the Dutch Disease Hypothesis," Research Department Publications 4678, Inter-American Development Bank, Research Department.
  • Handle: RePEc:idb:wpaper:4678
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    References listed on IDEAS

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    1. Charles I. Jones, 1995. "Time Series Tests of Endogenous Growth Models," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 495-525.
    2. Kevin Lee & M. Hashem Pesaran & Ron Smith, 1998. "Growth Empirics: A Panel Data Approach—A Comment," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 319-323.
    3. Raghuram G. Rajan & Arvind Subramanian, 2014. "Aid, Dutch Disease, and Manufacturing Growth," Working Papers id:6192, eSocialSciences.
    4. 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, pages 643-665.
    5. 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 191-216, June.
    6. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, pages 547-570.
    7. Rajan, Raghuram G. & Subramanian, Arvind, 2011. "Aid, Dutch disease, and manufacturing growth," Journal of Development Economics, Elsevier, pages 106-118.
    8. Thierry Tressel & Alessandro Prati, 2006. "Aid Volatility and Dutch Disease; Is There a Role for Macroeconomic Policies?," IMF Working Papers 06/145, International Monetary Fund.
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    Cited by:

    1. David Fielding & Fred Gibson, 2013. "Aid and Dutch Disease in Sub-Saharan Africa," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 22(1), pages 1-21, January.
    2. repec:unu:wpaper:wp2012-26 is not listed on IDEAS
    3. Lof, Matthijs & Mekasha, Tseday Jemaneh & Tarp, Finn, 2015. "Aid and Income: Another Time-series Perspective," World Development, Elsevier, pages 19-30.
    4. Gasmi, Farid & Laourari, Imène, 2017. "Has Algeria suffered from the dutch disease?: Evidence from 1960–2013 data," TSE Working Papers 17-780, Toulouse School of Economics (TSE).
    5. João Sousa Andrade & António Portugal Duarte, 2013. "The Dutch Disease in the Portuguese Economy," GEMF Working Papers 2013-05, GEMF, Faculty of Economics, University of Coimbra.
    6. Inmaculada Martínez-Zarzoso & Felicitas Nowak-Lehmann D. & Florian Johannsen, 2012. "Foreign Aid, Exports And Development In Euromed," Middle East Development Journal (MEDJ), World Scientific Publishing Co. Pte. Ltd., vol. 4(02), pages 1-24.
    7. Nowak-Lehmann D., Felicitas & Martínez-Zarzoso, Inmaculada & Cardozo, Adriana & Herzer, Dierk & Klasen, Stephan, 2011. "Does Aid translate into Bilateral Trade? Findings for Recipient Countries," Proceedings of the German Development Economics Conference, Berlin 2011 61, Verein für Socialpolitik, Research Committee Development Economics.
    8. Ben Naceur, Sami & Bakardzhieva, Damyana & Kamar, Bassem, 2012. "Disaggregated Capital Flows and Developing Countries’ Competitiveness," World Development, Elsevier, vol. 40(2), pages 223-237.
    9. Thorsten Schank & Claus Schnabel & Joachim Wagner, 2016. "Higher Wages in Exporting Firms: Self-selection, Export Effect, or Both? First Evidence from Linked Employer–Employee Data," World Scientific Book Chapters,in: Microeconometrics of International Trade, chapter 6, pages 215-241 World Scientific Publishing Co. Pte. Ltd..
    10. Herzer, Dierk & Nowak-Lehmann, Felicitas & Dreher, Axel & Klasen, Stephan & Martinez-Zarzoso, Inmaculada, 2015. "Comment on Lof, Mekasha, and Tarp (2014)," World Development, Elsevier, vol. 70(C), pages 389-396.

    More about this item

    Keywords

    Aid; Common factors; Dutch Disease; Growth Panel VARs; Exchange rate overvaluation;

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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