Aid, Dutch Disease and Manufacturing Growth

Posted: 26 Jan 2010

See all articles by Raghuram G. Rajan

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

Date Written: December 18, 2009

Abstract

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

Suggested Citation

Rajan, Raghuram G. and Subramanian, Arvind, Aid, Dutch Disease and Manufacturing Growth (December 18, 2009). Center for Global Development Working Paper No. 196, Available at SSRN: https://ssrn.com/abstract=1542716

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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Arvind Subramanian

International Monetary Fund (IMF) ( email )

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United States

Center for Global Development

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