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Macroeconomic Issues in Foreign Aid

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Author Info
Peter Hjertholm (Institute of Economics, University of Copenhagen)
Jytte Laursen (Danish Ministry of Foreign Affairs (Danida))
Howard White (University of Sussex, IDS)

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Abstract

The macroeconomic rationale for aid relates to its ability to supplem­ent savings, foreign exchange and government revenue, thus contributing to ­growth. This processes presumes a simple ­Harrod-Domar context in which growth is driven by physical capital formation. ­However, the macroeconomic reality of aid is more complicated. Three areas of complication are discussed: (i) the effects of aid on fiscal behaviour, (ii) debt problems and (iii) Dutch disease effects. In the long run, rather than merely filling gaps, aid should help close­ gaps, since reliance on future aid and foreign borrowing is thus diminished and economic policy autonomy is increased. Closing the savings gap entails financial and technical support for mobilisation of domestic savings. Closing the trade gap entails supporting a macro environment conducive to export growth, helping to expand and improve physical infrastructure and direct support for export activities, notably those of a non-traditional nature. Closing the fiscal gap entails support for increasing government revenue and improving expenditure management, which is the more delicate task since donors and recipient governments have to carefully balance the disadvantage of lower-than-needed government spending against the disadvantage of higher, and potentially distortionary, taxation.

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Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 00-05.

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Length: 61 pages
Date of creation: Mar 2000
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Handle: RePEc:kud:kuiedp:0005

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Related research
Keywords: Foreign Aid Macroeconomics of Aid Gap Models Aid Fungibility Fiscal Response Models Foreign Debt Dutch Disease

Find related papers by JEL classification:
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
F35 - International Economics - - International Finance - - - Foreign Aid
O10 - Economic Development, Technological Change, and Growth - - Economic Development - - - General

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Theodora Kosma & Dimitri G. Demekas & James McHugh, 2002. "The Economics of Post Conflict Aid," IMF Working Papers 02/198, International Monetary Fund. [Downloadable!]
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