Mahalanobis points to this FT article about new research by the IMF on the effects of development aid. I reprint a longer section of the article because I learned a lot there.
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Days before the Live-8 concerts around the world, and next week's Group of Eight countries summit in Scotland, the IMF has released two extensive research papers that suggest aid flows to poor countries have not led to higher growth rates, the main driver of poverty reduction. ...
“The basic message is that it is good that people are talking about increasing aid flows but that we have to find ways to make them more effective. “It is not the case that all that matters is good governance,” said Raghuram Rajan, the fund’s chief economist and co-author of the reports. “We know far less about what makes aid work than the public or governments would like. By acting like we know all the answers raises false expectations.” ...
Mr Rajan, and Arvind Subramanian, head of macroeconomic studies, argued that the contribution of aid flows to a country's rising exchange rate - undermining export competitiveness- was one reason why they failed to have a positive impact on growth. This may occur even when the aid provided to the government is well used.
Aid might also have contributed to poor productivity by depressing exports, the IMF research shows. Productivity growth is the most important determinant of living standards.
Economists call the impact of large windfall gains on an economy’s exchange rate and export competitiveness the “Dutch disease”, referring to the process whereby the discovery of Dutch natural gas reserves in the 1960s led to an appreciation of the country’s currency and a decline in its export sectors.
“The bad news is that even if delivered with the best intentions and used carefully by recipient governments, there are side effects like adverse effects on competitiveness, which can offset aid’s beneficial effect on growth,” the fund said. “The good news is that by paying careful attention to macroeconomic management and issues like absorptive capacity, perhaps aid may have a better chance of success. “
The IMF makes a distinction between aid that is given to promote growth and humanitarian aid, for example, after natural disasters, saying that the two should not be confused. “Humanitarian aid to save lives is right regardless of the macro effects. But when the aid is focusing on growth, you need to take into account the macro effects,” Mr Rajan said.
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