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

43 Pages Posted: 26 Dec 2009

See all articles by Ibrahim Elbadawi

Ibrahim Elbadawi

World Bank - Economic Development Institute

Linda Kaltani

International Monetary Fund (IMF)

Raimundo Soto

Pontifical Catholic University of Chile - Institute of Economics

Date Written: November 24, 2009

Abstract

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.

Keywords: Africa, Sub Sahara, real exchange rate, misalignment, exports, growth

JEL Classification: F41, F31, F35, F43

Suggested Citation

Elbadawi, Ibrahim and Kaltani, Linda and Soto, Raimundo, Aid, Real Exchange Rate Misalignment and Economic Performance in Sub-Saharan Africa (November 24, 2009). Available at SSRN: https://ssrn.com/abstract=1526569 or http://dx.doi.org/10.2139/ssrn.1526569

Ibrahim Elbadawi

World Bank - Economic Development Institute ( email )

1818 H Street
Washington, DC 20433
United States

HOME PAGE: http://econ.worldbank.org/staff/ielbadawi

Linda Kaltani

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Raimundo Soto (Contact Author)

Pontifical Catholic University of Chile - Institute of Economics ( email )

Casilla 76
Correo 17
Santiago
Chile

Register to save articles to
your library

Register

Paper statistics

Downloads
145
Abstract Views
836
rank
201,133
PlumX Metrics