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Aid, Dutch Disease, And Manufacturing Growth

Date Added: Dec 2009
Format: PDF

The authors 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. They find that aid inflows have systematic adverse effects on a country's competitiveness, as reflected in the lower relative growth rate of exportable industries. They provide some evidence suggesting that the channel for these effects is the real exchange rate appreciation caused by aid inflows. They conjecture that this may explain, in part, why it is hard to find robust evidence that foreign aid helps countries grow.