In this paper we construct a standard CGE model to explore the impact of scaling up infrastructure in an African country. As the debate on the importance of scaling up infrastructure to stimulate growth and provide a push to African economies, some analyst raise concern on financing these infrastructures after construction and that external funding of these can create major distortion and have a negative impact on the trade balance of these countries. This study aims to provide so insight into this debate. It draws from the infrastructure productivity literature to postulate positive productive externalities of new infrastructure and Fay and Yepes (2003) for operating cost associated with new infrastructure. We compare various infrastructure investment funded with different fiscal tools. These investments scenarios are compared to non productive investment that can be interpreted as a business as usual scenario. Our results show that foreign aid does produce Dutch disease effects but the negative impacts are strongly dependent on the type of investments performed. Moreover, growth effects contribute to attenuate the negative effects.
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Paper provided by Université Libre de Bruxelles, Ecares in its series ECARES Working Papers with number
2009_009.
Find related papers by JEL classification: C68 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computable General Equilibrium Models E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy F35 - International Economics - - International Finance - - - Foreign Aid H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
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