What Undermines Aid`s Impact on Growth?

55 Pages Posted: 3 Mar 2006  

Raghuram G. Rajan

University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)

Arvind Subramanian

International Monetary Fund (IMF); Center for Global Development

Multiple version iconThere are 2 versions of this paper

Date Written: June 2005

Abstract

We examine one of the most important and intriguing puzzles in economics: why it is so hard to find a robust effect of aid on the long-term growth of poor countries, even those with good policies. We look for a possible offset to the beneficial effects of aid, using a methodology that exploits both cross-country and within-country variation. We find that aid inflows have systematic adverse effects on a country`s competitiveness, as reflected in a decline in the share of labor intensive and tradable industries in the manufacturing sector. We find evidence suggesting that these effects stem from the real exchange rate overvaluation caused by aid inflows. By contrast, private-to-private flows like remittances do not seem to create these adverse effects. We offer an explanation why and conclude with a discussion of the policy implications of these findings.

Keywords: Aid, Growth, Competitiveness

JEL Classification: 01, 040

Suggested Citation

Rajan, Raghuram G. and Subramanian, Arvind, What Undermines Aid`s Impact on Growth? (June 2005). IMF Working Paper, Vol. , pp. 1-55, 2005. Available at SSRN: https://ssrn.com/abstract=887995

Raghuram G. Rajan (Contact Author)

University of Chicago - Booth School of Business ( email )

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International Monetary Fund (IMF) ( email )

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National Bureau of Economic Research (NBER)

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773-702-9299 (Phone)
773-702-0458 (Fax)

Arvind Subramanian

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Center for Global Development

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5th floor
Washington, DC 20036
United States

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