Aid for Africa: A Case of the Dutch disease?

This paper aims to identify one of the possible causes as to why aid is ineffective in Sub-Saharan Africa in the late 20th and the beginning of the 21st century. A number of prominent economists have linked this phenomenon to the Dutch Disease, otherwise also known as the resource curse. The disease occurs when a country experiences a wealth effect due to the discovery of natural resources, and subsequently perform poorer economically due to an appreciation of the exchange rate (spending effect) and a stagnating manufacturing sector (resource movement effect). This paper uses a fixed effect panel regression model to determine whether this wealth effect occurred following higher levels of aid being sent to Sub-Saharan Africa over the period of 1960 to 2013. From the general equilibrium model constructed at the start of this paper, the spending effect is expected to hold while the resource movement is expected not to occur. Empirically, the symptom of the spending effect is shown to indeed be present, but only if the inflow of aid has a large enough volume at a given point in time. This paper finds that the resource movement is not present, as the lagged effect of aid on the manufacturing sector is robustly positive. This paper concludes that the Dutch Disease did not occur, despite the symptoms being present as they are offset in the long run, a finding shared by Torvik (2001). These symptoms appear to become more pronounced as the volume of aid flowing into a given economy increases. This merits the policy implication that aid inflows should be moderated and spread over a longer period of time in order to avoid the Dutch Disease symptoms transgressing into an actual Disease.