Aid, Real Exchange Rate Misalignment and Economic Performance in Sub-Saharan Africa

Ibrahim Elbadawi, Linda Kaltani and Raimundo Soto

No 368, Documentos de Trabajo from Instituto de Economia. Pontificia Universidad Católica de Chile.

Abstract: Generating sustained growth in Sub-Saharan Africa is one of the most pressing challenges in global development. As the region needs foreign assistance to jump start its development, foreign aid becomes crucial. However, aid booms can also lead to exchange rate overvaluation curtailing exports and growth. This paper provides new evidence on the impact of aid and overvaluation on growth and exports using a sample of 83 countries from 1970 to 2004. We find that aid fosters growth (with decreasing returns) but induces overvaluation. Overvaluation reduces growth but the effect is ameliorated by financial development. Finally, we find new evidence on the negative impact of overvaluation on export diversification and sophistication.

Keywords: Africa; Sub Sahara; real exchange rate; misalignment; exports; growth (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-afr and nep-fdg
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Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:ioe:doctra:368

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