Aid and dutch disease in Sub-Saharan Africa

Abstract

International aid has an ambiguous effect on the macroeconomy of the recipient country. To the extent that aid raises consumer expenditure, there will be some real exchange rate appreciation and a shift of resources away from traded goods production and into non-traded goods production. However, aid for investment in the traded goods sector can mitigate this effect. Also, a relatively high level of productivity in the non-traded goods sector combined with a high level of investment will tend to depreciate the real exchange rate. We examine aid inflows in twenty-six Sub- Saharan African countries and find a variety of macroeconomic responses. Some of the variation in the responses can be explained by variation in observable country characteristics; this has implications for donor policy. © The author 2012. Published by Oxford University Press on behalf of the Centre for the Study of African Economies. All rights reserved.