What Undermines Aid's Impact on Growth?

By Raghuram G. Rajan, Arvind Subramanian. Social Science Research Network, 2005

630 citations recorded by the source corpus.

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.

Subfields: Development, Safety Research, Sociology and Political Science

View Paper: https://www.semanticscholar.org/paper/f512dce84d56f05953c796ead5dd628536bc7bd3

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Development

In Safety Research

In Sociology and Political Science

Citations in the corpus

Financial development, remittances, and real exchange rate appreciation (2009, background): “For instance, Amuedo-Dorantes and Pozo (2004), Rajan and Subramanian (2005), Winters and Martins (2005), and Lopez, Molina, and Bussolo (2007) all find that remittances can, in fact, cause real exchange rate appreciation.”
When and Why Worry About Real Exchange Rate Appreciation? The Missing Link Between Dutch Disease and Growth (2013, background): “In contrast, Rajan and Subramanian (2005) find evidence suggesting that remittances do not create DD effects.”
Africa's Money in Africa (2013, background): “Amuedo-Dorantes and Pozo, 2004; Rajan and Subramanian, 2005) observe that remittance inflow can result to the circulation of excess funds and resource reallocation towards non-tradable.”
Evaluating the Economic Impact of International Remittances On Developing Countries Using Household Surveys: A Literature Review (2011, background): “To investigate this possibility, Rajan and Subramanian (2005) use a cross national dataset of three-digit industry value-added growth data from 33 developing countries to examine the impact of remittances on external competitiveness.”
The Dynamic Implications of Foreign Aid and its Variability (2005, positive): “But such analyses — with the exception of Adam and Bevan (2003) and Rajan and Subramanian (2005) — have not generally been integrated into the analysis of the decline in the tradables sector in response to sustained aid inflows.”