Foreign Aid and Dutch Disease: A Case Study of Burkina Faso, Gambia, Malawi, and Mozambique

Abstract

Foreign aid has shaped the economies of Sub-Saharan Africa since independence. There has been passionate debate as to whether this has helped or hurt Africa’s poor economies. One of the downsides to foreign aid is the effect it can have on appreciating the real exchange rate and on harming the competitiveness of export-oriented sectors in favour of producers of non-traded goods. I find that the influence of aid flows on the real exchange rate varies greatly across countries, and that movements in the real exchange rate driven by foreign aid have been overshadowed by policy changes and structural adjustment.

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