TY  - JOUR
AU  - Rajan,Raghuram G.
AU  - Subramanian,Arvind
TI  - What Undermines Aid's Impact on Growth?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11657
PY  - 2005
Y2  - October 2005
UR  - http://www.nber.org/papers/w11657
L1  - http://www.nber.org/papers/w11657.pdf
N1  - Author contact info:
Raghuram Rajan
Booth School of Business
University of Chicago
5807 South Woodlawn Avenue
Chicago, IL 60637
Tel: 773/702-4437
Fax: 773/702-0458
E-Mail: raghuram.rajan@ChicagoBooth.edu

Arvind Subramanian
Peterson Institute for International Economics
1750 Massachusetts Ave, NW
Washington, DC  20036
E-Mail: asubramanian@piie.com
M2  - featured in NBER digest on 2005-10-03
AB  - 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.
ER  -