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The Macroeconomic Impact of Scaled-Up Aid

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Author Info

  • Emilio Sacerdoti
  • Gonzalo Salinas
  • Abdikarim Farah

Abstract

We develop a simple macroeconomic model that assesses the effects of higher foreign aid on output growth and other macroeconomic variables, including the real exchange rate. The model is easily tractable and requires estimation of only a few basic parameters. It takes into account the impact of aid on physical and human capital accumulation, while recognizing that the impact of the latter is more protracted. Application of the model to Niger-one of the poorest countries in the world-suggests that if foreign aid as a share of GDP were to be permanently increased from the equivalent of 10 percent of GDP in 2007 to 15 percent in 2008, annual economic growth would accelerate by more than 1 percentage point, without generating significant risks for macroeconomic stability. As a result, by 2020 Niger''s income per capita would be 12.5 percent higher than it would be without increased foreign aid. Moreover, the higher growth would help Niger to cut the incidence of poverty by 25 percent by 2015, although the country will still be unable to reach the Millennium Development Goal of poverty reduction (MDG 1).

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/36.

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Length: 33
Date of creation: 01 Mar 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/36

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Related research

Keywords: Capital accumulation; Low-income developing countries; Aid flows; Economic growth; Poverty reduction; Economic models; exchange rate; real exchange rate; gdp growth; growth rate; capital formation; gdp growth rate; exchange rate appreciation; per capita income; real gdp; real exchange rate appreciation; private consumption; annual economic growth; fixed exchange rate; gdp per capita; exchange rate increases; exchange rate policies; foreign exchange; exchange rate regime; growth rates; pro-poor growth; gdp deflator; total factor productivity; gdp growth rates; growth model; exchange rate overvaluation;

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References

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  1. Matteo Bobba & Andrew Powell, 2007. "Aid and Growth: Politics Matters," Research Department Publications 4511, Inter-American Development Bank, Research Department.
  2. C-J. Dalgaard & H. Hansen, 2001. "On Aid, Growth and Good Policies," Journal of Development Studies, Taylor & Francis Journals, vol. 37(6), pages 17-41.
  3. Raghuram G. Rajan, 2005. "Aid and Growth: What Does The Cross-Country Evidence Really Show?," Working Papers id:54, eSocialSciences.
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  8. Michael A. Clemens & Steven Radelet & Rikhil Bhavnani, 2004. "Counting chickens when they hatch: The short-term effect of aid on growth," International Finance 0407010, EconWPA.
  9. Mankiw, N Gregory & Romer, David & Weil, David N, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 407-37, May.
  10. Minoiu, Camelia & Reddy, Sanjay G., 2010. "Development aid and economic growth: A positive long-run relation," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(1), pages 27-39, February.
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  12. Pierre-Richard Agénor & Nihal Bayraktar & Emmanuel Pinto Moreira & Karim El Aynaoui, 2006. "Achieving the Millennium Development Goals in Sub-Saharan Africa: A Macroeconomic Monitoring Framework," The World Economy, Wiley Blackwell, vol. 29(11), pages 1519-1547, November.
  13. Griffin, Keith B & Enos, J L, 1970. "Foreign Assistance: Objectives and Consequences," Economic Development and Cultural Change, University of Chicago Press, vol. 18(3), pages 313-27, April.
  14. Raghuram Rajan & Arvind Subramanian, 2005. "Aid and Growth," IMF Working Papers 05/127, International Monetary Fund.
  15. Papanek, Gustav F, 1973. "Aid, Foreign Private Investment, Savings, and Growth in Less Developed Countries," Journal of Political Economy, University of Chicago Press, vol. 81(1), pages 120-30, Jan.-Feb..
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  17. Emanuele Baldacci & Qiang Cui & Benedict J. Clements & Sanjeev Gupta, 2004. "Social Spending, Human Capital, and Growth in Developing Countries," IMF Working Papers 04/217, International Monetary Fund.
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Citations

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Cited by:
  1. Strand, Jon, 2009. ""Revenue management"effects related to financial flows generated by climate policy," Policy Research Working Paper Series 5053, The World Bank.
  2. Joannes Mongardini & Issouf Samaké, 2009. "The Macroeconomics of Scaling Up Aid," IMF Working Papers 09/115, International Monetary Fund.

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