Publication: Foreign Aid, the Real Exchange Rate, and Economic Growth in the Aftermath of Civil Wars
Date
2008-01-30
ISSN
1564-698X
Published
2008-01-30
Author(s)
Elbadawi, Ibrahim Ahmed
Kaltani, Linda
Schmidt-Hebbel, Klaus
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.
Citation
“Elbadawi, Ibrahim Ahmed; Kaltani, Linda; Schmidt-Hebbel, Klaus. 2008. Foreign Aid, the Real Exchange Rate, and Economic Growth in the Aftermath of Civil Wars. World Bank Economic Review. © World Bank. http://openknowledge.worldbank.org/entities/publication/bc7f495a-6eda-5bb5-abf7-58d0fc45d655 License: CC BY-NC-ND 3.0 IGO.”
Report Series
Other publications in this report series
Journal
Journal
World Bank Economic Review
1564-698X
Journal Volume
Journal Volume
Journal Issue
Journal Issue