Foreign aid and labor productivity

The paper examines empirically the idea that aid to poor countries is detrimen-tal for competitiveness and average labor productivity. Results at the aggregate level show that this is not the case: aid is found to have a positive marginal e¤ect on growth of output per worker. The e¤ect is reduced in countries unfavorable geographic conditions, but can be increased in countries that reduce structural lim-itations. Results from a sectoral decomposition show that aid has a signi\u85cant positive marginal impact on labor productivity in both the tradables and nontrad-ables sectors. We thus \u85nd no empirical support for the hypothesis that aid causes Dutch disease or reduces external competitiveness in developing countries. Possible reasons are the existence of large idle labor capacity and high levels dollarization in nancial liabilities at the \u85rm level