Post-Conflict Aid, Real Exchange Rate Adjustment, and Catch-Up Growth

44 Pages Posted: 20 Apr 2016

See all articles by Ibrahim Elbadawi

Ibrahim Elbadawi

World Bank - Economic Development Institute

Linda Kaltani

American University - Department of Economics

Klaus Schmidt-Hebbel

Central Bank of Chile

Date Written: April 1, 2007

Abstract

Post-conflict countries receive substantial aid flows after the start of peace. While post-conflict countries' capacity to absorb aid (that is, the quality of their policies and institutions) is built up only gradually after the onset of peace, the evidence suggests that aid tends to peak immediately after peace is attained and decline thereafter. Aid composition broadly reflects post-conflict priorities, with large parts of aid financing social expenditure and infrastructure investment. Aid has significant short-term effects on the real exchange rate (RER), as inferred from the behavior of RER in the world. While moderate RER overvaluation is observed in post-conflicts, it cannot be traced down to the aid flows. The empirical evidence on world growth reveals new findings about the pattern of catch-up growth during post-conflicts and the role of key growth determinants on post-conflict growth. Aid is an important determinant of growth, both generally and more strongly during post-conflict periods. Because RER misalignment reduces growth, RER overvaluation during post-conflicts reduces catch-up growth. Aid and RER overvaluation combined also lower growth. But the negative growth effect of RER overvaluation declines with financial development.

Keywords: Social Conflict and Violence, Economic Theory & Research, Development Economics & Aid Effectiveness, Post Conflict Reintegration, Pro-Poor Growth and Inequality

Suggested Citation

Elbadawi, Ibrahim and Kaltani, Linda and Schmidt-Hebbel, Klaus, Post-Conflict Aid, Real Exchange Rate Adjustment, and Catch-Up Growth (April 1, 2007). World Bank Policy Research Working Paper No. 4187. Available at SSRN: https://ssrn.com/abstract=977602

Ibrahim Elbadawi (Contact Author)

World Bank - Economic Development Institute ( email )

1818 H Street
Washington, DC 20433
United States

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

Linda Kaltani

American University - Department of Economics ( email )

4400 Massachusetts Avenue, N.W.
Washington, DC 20016-8029
United States

Klaus Schmidt-Hebbel

Central Bank of Chile ( email )

Agustinas 1180
Santiago
Chile
(56-2) 670-2386, 670-2586 (Phone)
(56-2) 670-2836 (Fax)

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