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Foreign Aid, the Real Exchange Rate, and Economic Growth in the Aftermath of Civil Wars |
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| Authors: | Elbadawi Ibrahim A; Kaltani Linda; Schmidt-Hebbel Klaus |
| Institution: | Ibrahim Elbadawi (corresponding author) is a lead economist in the Development Economics Research Group of the World Bank Linda Kaltani is an economist at the International Monetary Fund. her email address is lkaltani{at}imf.org Klaus Schmidt-Hebbel is professor of economics at the Catholic University of Chile; his email address is kschmidt{at}bcentral.cl. A preliminary version of this article was presented at the first collaborative research project workshop, "Political Institutions, Development and a Domestic Civil Peace," held in Oslo, June 19–20, 2006. The conference was organized by the Development Economic Research Group of the World Bank; the Centre for the Studies of African Economies, at the University of Oxford; and the International Peace Research Institute (PRIO), Oslo |
| Abstract: | Foreign aid, the real exchange rate (RER), and economic growthare three key variables that shape the aftermath of civil warsin many developing countries. Panel estimations drawn from asample of 39 conflict and 44 nonconflict countries between 1970and 2004 indicate that although postconflict countries receivelarger aid flows and exhibit moderate RER overvaluation afterpeace is attained, overvaluation cannot be traced to aid. Yetforeign aid is among the significant determinants of the equilibriumRER. Aid is also an important determinant of economic growth,particularly after peace is reached. Aid exhibits decreasingreturns, however, and interacts negatively with RER overvaluation.RER overvaluation reduces growth, but this effect is amelioratedby financial development. Postconflict policies should thereforeaim to use aid prudently, avoid RER misalignment, and supportfinancial and capital market development to achieve high andstable growth in the aftermath of war and beyond. |
| Keywords: | F5 F3 F43 |
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