Aid and Sectoral Growth: Evidence from Panel Data
Journal of Development Studies 46(10): 1749-1966
Posted: 31 May 2012
Date Written: November 2010
This article examines empirically the proposition that aid to poor countries is detrimental for external competitiveness, giving rise to Dutch disease type eﬀects. At the aggregate level, aid is found to have a positive eﬀect on growth. A sectoral decomposition shows that the eﬀect is (i) signiﬁcant and positive in the tradable and the nontradable sectors, and (ii) equally strong in both sectors. The article thus provides no empirical support for the hypothesis that aid reduces external competitiveness in developing countries. A possible reason for this ﬁnding is the existence of large idle labour capacity that prevents the real exchange rate from appreciating.
Keywords: Foreign aid, sectoral growth, dutch disease
JEL Classification: F35
Suggested Citation: Suggested Citation