Effects of aid on export competitiveness: A cross-country analysis

• Main Authors: Chua, Nancy C., Futol, Deanna Sarah S., Lao, Jan Patrick T., Tapiceria, Ralfh Keno M.
• Format: text
• Language: English
• Published: Animo Repository 2006
• Subjects: Economic assistance > Developing countries; Exports; Foreign exchange rates; Economics
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/14365
• Institution: De La Salle University

This paper will examine the cross-country effects of aid on the movements of the real exchange rate using annual data from 1990-1999 of 39 aid-receiving countries. Empirical evidences support the hypothesis that foreign aid inflow causes downward pressure on the real exchange rate of the recipient countries. The aid variable affects export competitiveness through the exchange rate and this will be deemed endogenous. The results showed that aid has a negative impact on the real exchange rate, giving the recipient countries a price disadvantage on their export commodities. This is one of the manifestations of the famous Dutch disease. Furthermore, not only does aid indirectly affect exports but it also exhibits a direct negative relationship due to resource shifts experienced by the tradable sector. In addition, given this adverse effect from aid inflows, the presence of corruption tends to worsen the impact on competitiveness.