Columbia International Affairs Online: Working Papers

CIAO DATE: 01/2010

Aid, Dutch Disease, and Manufacturing Growth - Working Paper 196

Raghuram G. Rajan, Arvind Subramanian

December 2009

Center for Global Development


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.