The authors examine the effects of aid on the growth of manufacturing using a methodology that exploits the variation within countries and across manufacturing sectors and that corrects for possible reverse causality. They find that aid inflows have systematic adverse effects on a country’s competitiveness, as reflected in the lower relative growth rate of exportable industries. They provide some evidence suggesting that the channel for these effects is the real exchange rate appreciation caused by aid inflows. This may explain, in part, why it is hard to find robust evidence that foreign aid helps countries grow.
Related Content: David Roodman blogs on the topic; Subramanian responds.
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