Aid, Public Expenditure and Dutch Disease
AbstractContemporary policy debates on the macroeconomics of aid often concentrate on short-run Dutch disease effects, ignoring the possible supply side impact of aid- financed public expenditure. We develop a simple model of aid and public expenditure in which public infrastructure capital generates an inter-temporal productivity spillover for both tradable and non-tradable sectors, where these productivity effects may display sector-specific biases. The model also allows for non-homothetic demands. We then use an extended version of this model, calibrated to contemporary conditions in Uganda, to simulate the effect of a step increase in net aid flows. Our simulations show that beyond the short-run, where Dutch disease effects are present, the relationship between enhanced aid flows, real exchange rates and welfare is less straightforward than simple models of aid suggest. We show that public infrastructure which generates a productivity bias in favour of non-tradable production delivers the largest aggregate return to aid, with the real exchange rate appreciation reduced or reversed and enhanced export performance, but it does so at the cost of a deterioration in the income distribution. Income gains accrue predominantly to urban skilled and unskilled households, leaving the rural poor relatively worse off. Under plausible parameterizations of the model the rural poor may also be worse off in absolute terms.
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Bibliographic InfoPaper provided by Centre for the Study of African Economies, University of Oxford in its series CSAE Working Paper Series with number 2003-02.
Date of creation: 2003
Date of revision:
Aid; Dutch Disease; Public Expenditure; Africa.;
Other versions of this item:
- Christopher Adam & David Bevan, 2004. "Aid, Public Expenditure and Dutch Disease," Development and Comp Systems 0409027, EconWPA.
- Christopher Adam & David Bevan, 2003. "Aid, Public Expenditure and Dutch Disease," Economics Series Working Papers WPS/2003-02, University of Oxford, Department of Economics.
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
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