Aid, Dutch Disease and Manufacturing Growth
Raghuram G. Rajan
University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)
International Monetary Fund (IMF); Center for Global Development
December 18, 2009
Center for Global Development Working Paper No. 196
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.
Keywords: Manufacturing, Economic Development, Dutch Disease, CGD, Center for Global Development
Date posted: January 26, 2010
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