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Could Foreign-Aid Financing Cause Excess Depreciation of Public Capital? Two Simple Hypothetical Cases

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  • Bu, Yisheng

    (Liberty Mutual Group, Boston, Massachusetts 02116, USA)

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    Abstract

    This paper examines the possibility that foreign aid financing for public capital accumulation in developing countries may lead to excess depreciation of capital. The depreciation rate on public capital is endogenised in a general equilibrium framework in which the government collects a consumption tax to finance maintenance and repair expenditures as well as public investment. Two simple cases are formulated and analysed to show that excess depreciation of public capital may result from budgetary and international aid and financing distortions that skew allocations to new investment rather than to maintenance of existing capital.

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    File URL: http://eap-journal.com/archive/v34_i2_4.pdf
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    Bibliographic Info

    Article provided by Queensland University of Technology (QUT), School of Economics and Finance in its journal Economic Analysis and Policy (EAP).

    Volume (Year): 34 (2004)
    Issue (Month): 2 (September)
    Pages: 189-202

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    Handle: RePEc:eap:articl:v:34:y:2004:i:2:p:189-202

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    Web page: http://www.journals.elsevier.com/economic-analysis-and-policy/
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    Related research

    Keywords: Accumulation; Aid; Capital; Expenditure; Foreign Aid; Investment; Public Capital;

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    1. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
    2. V. V. Chari & Patrick J. Kehoe, 1999. "Optimal Fiscal and Monetary Policy," NBER Working Papers 6891, National Bureau of Economic Research, Inc.
    3. Isham, Jonathan & Kaufmann,Daniel, 1995. "The forgotten rationale for policy reform : the productivity of investment projects," Policy Research Working Paper Series 1549, The World Bank.
    4. David Aschauer, 1988. "Is public expenditure productive?," Staff Memoranda 88-7, Federal Reserve Bank of Chicago.
    5. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 485-517, June.
    6. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
    7. Howell H. Zee & Vito Tanzi, 2000. "Tax Policy for Emerging Markets - Developing Countries," IMF Working Papers 00/35, International Monetary Fund.
    8. Easterly, William, 1999. "The ghost of financing gap: testing the growth model used in the international financial institutions," Journal of Development Economics, Elsevier, vol. 60(2), pages 423-438, December.
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