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

  • Ibrahim A. Elbadawi
  • Linda Kaltani
  • Raimundo Soto

    ()

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

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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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
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Handle: RePEc:ioe:doctra:368
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  1. Francisco Maeso-Fernandez & Chiara Osbat & Bernd Schnatz, 2001. "Determinants of the euro real effective exchange rate: a BEER/PEER approach," International Finance 0111003, EconWPA.
  2. Arne Bigsten & Paul Collier & Stefan Dercon & Marcel Fachamps & Bernard Gauthier & Jan Willem Gunning & Abena Oduro & Remco Oostendorp & Catherine Pattillo & Mans Soderbom & Francis Teal & Albert Zeuf, 2004. "Do African manufacturing firms learn from exporting?," Development and Comp Systems 0409071, EconWPA.
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