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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)

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.

Suggested Citation

  • Bu, Yisheng, 2004. "Could Foreign-Aid Financing Cause Excess Depreciation of Public Capital? Two Simple Hypothetical Cases," Economic Analysis and Policy, Elsevier, vol. 34(2), pages 189-202, September.
    • Handle: RePEc:eee:ecanpo:v:34:y:2004:i:2:p:189-202
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    More about this item

    Keywords

    Accumulation; Aid; Capital; Expenditure; Foreign Aid; Investment; Public Capital;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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