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Foreign Aid, the Real Exchange Rate, and Economic Growth in the Aftermath of Civil Wars

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  • Ibrahim A. Elbadawi
  • Linda Kaltani
  • Klaus Schmidt-Hebbel

Abstract

Foreign aid, the real exchange rate (RER), and economic growth are three key variables that shape the aftermath of civil wars in many developing countries. Panel estimations drawn from a sample of 39 conflict and 44 nonconflict countries between 1970 and 2004 indicate that although postconflict countries receive larger aid flows and exhibit moderate RER overvaluation after peace is attained, overvaluation cannot be traced to aid. Yet foreign aid is among the significant determinants of the equilibrium RER. Aid is also an important determinant of economic growth, particularly after peace is reached. Aid exhibits decreasing returns, however, and interacts negatively with RER overvaluation. RER overvaluation reduces growth, but this effect is ameliorated by financial development. Postconflict policies should therefore aim to use aid prudently, avoid RER misalignment, and support financial and capital market development to achieve high and stable growth in the aftermath of war and beyond. Copyright The Author 2008. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development / the world bank . All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org, Oxford University Press.

Suggested Citation

  • Ibrahim A. Elbadawi & Linda Kaltani & Klaus Schmidt-Hebbel, 2008. "Foreign Aid, the Real Exchange Rate, and Economic Growth in the Aftermath of Civil Wars," The World Bank Economic Review, World Bank, vol. 22(1), pages 113-140, February.
    • Handle: RePEc:oup:wbecrv:v:22:y:2008:i:1:p:113-140
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    Cited by:

    1. De Janvry,Alain F., 2015. "Quantifying through ex post assessments the micro-level impacts of sovereign disaster risk financing and insurance programs," Policy Research Working Paper Series 7356, The World Bank.
    2. Devadas,Sharmila & Elbadawi,Ibrahim Ahmed & Loayza,Norman V., 2019. "Growth after War in Syria," Policy Research Working Paper Series 8967, The World Bank.
    3. International Monetary Fund, 2009. "Sierra Leone: Selected Issues and Statistical Appendix," IMF Staff Country Reports 2009/012, International Monetary Fund.
    4. Zhang, Wei-Wei & Sadiq, Ramla & Khan, Tahseen Mohsan & Khan, Muhammad Mohsan, 2021. "Policy implications of remittances, trade liberalization and Dutch disease – A comparative analysis based on income categorization," Resources Policy, Elsevier, vol. 72(C).
    5. Ben Naceur, Sami & Bakardzhieva, Damyana & Kamar, Bassem, 2012. "Disaggregated Capital Flows and Developing Countries’ Competitiveness," World Development, Elsevier, vol. 40(2), pages 223-237.
    6. Dorinet, Elizavetta & Jouvet, Pierre-André & Wolfersberger, Julien, 2021. "Is the agricultural sector cursed too? Evidence from Sub-Saharan Africa," World Development, Elsevier, vol. 140(C).
    7. Martin Philipp Heger & Eric Neumayer, 2022. "Economic legacy effects of armed conflict: Insights from the civil war in Aceh, Indonesia," Conflict Management and Peace Science, Peace Science Society (International), vol. 39(4), pages 394-421, July.
    8. Narayan Sethi & Purna Chandra Padhan & Devi Prasad Dash, 2024. "When Is Aid Credible in the Emerging Asian economies? An Empirical Re-assessment from the Perspective of Economic Growth," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(2), pages 7331-7357, June.
    9. Jean-Louis COMBES & Patrick PLANE & Tidiane KINDA, 2010. "Capital Flows and their Impact on the Real Effective Exchange Rate," Working Papers 201032, CERDI.
    10. Mr. Antonio David & Mr. Fabiano Rodrigues Rodrigues Bastos & Marshall Mills, 2011. "Post-Conflict Recovery: Institutions, Aid, or Luck?," IMF Working Papers 2011/149, International Monetary Fund.
    11. Pradhan, Rudra P. & Bennett, Sara E. & Nair, Mahendhiran S. & Arvin, Mak B., 2023. "Does foreign aid procurement in resource-rich countries depend on these countries’ financial development and institutional quality? Evidence from PVECM and quantile-on-quantile regression," Socio-Economic Planning Sciences, Elsevier, vol. 88(C).
    12. Combes, Jean-Louis & Kinda, Tidiane & Plane, Patrick, 2012. "Capital flows, exchange rate flexibility, and the real exchange rate," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 1034-1043.
    13. Mr. Joannes Mongardini & Brett Rayner, 2009. "Grants, Remittances, and the Equilibrium Real Exchange Rate in Sub-Saharan African Countries," IMF Working Papers 2009/075, International Monetary Fund.
    14. Miss Anke Weber & Ms. Chunfang Yang, 2011. "Armenia: An Assessment of the Real Exchange Rate and Competitiveness," IMF Working Papers 2011/020, International Monetary Fund.
    15. Ibrahim A. Elbadawi & Linda Kaltani, 2014. "Real Exchange Rates and Export Performance in Oil-Dependent Arab Economies," Working Papers 878, Economic Research Forum, revised Nov 2014.
    16. Klose, Jens, 2024. "Empirical effects of sanctions and support measures on stock prices and exchange rates in the Russia–Ukraine war," Global Finance Journal, Elsevier, vol. 59(C).
    17. Marta C. N. Simões, 2011. "Education Composition and Growth: A Pooled Mean Group Analysis of OECD Countries," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(4), pages 455-471, December.
    18. Dorinet, Elizavetta & Jouvet, Pierre-André & Wolfersberger, Julien, 2021. "Is the agricultural sector cursed too? Evidence from Sub-Saharan Africa," World Development, Elsevier, vol. 140(C).
    19. Fuchs, Andreas & Richert, Katharina, 2015. "Do Development Minister Characteristics Affect Aid Giving?," Working Papers 0604, University of Heidelberg, Department of Economics.
    20. Pham Van Dai & Sarath Delpachitra & Simon Cottrell, 2017. "Real Exchange Rate And Economic Growth In East Asian Countries: The Role Of Financial Integration," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 62(01), pages 163-177, March.
    21. Emmanuel Buabeng & Enock Kojo Ayesu & Opoku Adabor, 2019. "The Effect of Exchange Rate Fluctuation on the Performance of Manufacturing Firms: An Empirical Evidence from Ghana," Economics Literature, WERI-World Economic Research Institute, vol. 1(2), pages 133-147, December.
    22. Burçak Polat & Antonio Rodríguez Andrés, 2019. "Do emigrants’ remittances cause Dutch disease? A developing countries case study," The Economic and Labour Relations Review, , vol. 30(1), pages 59-76, March.

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