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Gearing Macroeconomic Policies to Manage Large Inflows of ODA: The Implications for HIV/AIDS Programmes

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Author Info
Chowdhury, Anis
McKinley, Terry
Abstract

This paper examines how macroeconomic policies can be managed to accommodate a large inflow of foreign aid to combat the HIV/AIDS epidemic and still maintain macroeconomic stability. Because of the daunting scale of this epidemic, funds need to be disbursed urgently in order to contain its spread, yet some economists worry that rapidly scaling up foreign assistance for this purpose will cause inflation and appreciation of the real exchange rate. If such effects occur, they could impair a country's international competitiveness and endanger its growth prospects. However, this paper maintains that such effects can be minimized if governments and central banks coordinate fiscal, monetary and exchange rate policies. If they do, they should be able to both 'spend' aid in order to finance larger government programmes and 'absorb' aid in order to import more real resources. Often, governments that receive foreign aid neither spend nor absorb it fully, defeating the basic purpose of development assistance. Because governments fear inflation, they are reluctant to finance a significant increase in spending on HIV/AIDS programmes even when the funding is available. Central banks are reluctant to sell the foreign currency they receive from HIV/AID related aid because they fear ...

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Paper provided by World Institute for Development Economic Research (UNU-WIDER) in its series Working Papers with number UNU-WIDER Research Paper RP2007/43.

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Length: 30 pages
Date of creation: 2007
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Handle: RePEc:unu:wpaper:rp2007-43

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Keywords: foreign aid; Dutch disease; HIV/AIDS; macroeconomic policies;

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References listed on IDEAS
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  1. Christopher Adam & David Bevan, 2004. "Aid and the Supply Side: Public Investment, Export Performance and Dutch Disease in Low Income Countries," Economics Series Working Papers 201, University of Oxford, Department of Economics. [Downloadable!]
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  2. Yongzheng Yang & Sanjeev Gupta & Robert Powell, 2005. "The Macroeconomic Challenges of Scaling Up Aid to Africa," IMF Working Papers 05/179, International Monetary Fund. [Downloadable!]
  3. Wijnbergen, Sweder Van, 1986. "Macroeconomic aspects of the effectiveness of foreign aid: On the two-gap model, home goods disequilibrium and real exchange rate misalignment," Journal of International Economics, Elsevier, vol. 21(1-2), pages 123-136, August. [Downloadable!] (restricted)
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  4. Peter S. Heller, 2005. "Pity the Finance Minister: Issues in Managing a Substantial Scaling-Up of Aid Flows," IMF Working Papers 05/180, International Monetary Fund. [Downloadable!]
  5. Gupta, Sanjeev & Clements, Benedict & Baldacci, Emanuele & Mulas-Granados, Carlos, 2005. "Fiscal policy, expenditure composition, and growth in low-income countries," Journal of International Money and Finance, Elsevier, vol. 24(3), pages 441-463, April. [Downloadable!] (restricted)
  6. Choi, E. Kwan, 2004. "Aid allocation and the transfer paradox in small open economies," International Review of Economics & Finance, Elsevier, vol. 13(3), pages 245-251. [Downloadable!] (restricted)
  7. William Easterly, 2003. "Can Foreign Aid Buy Growth?," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 23-48, Summer. [Downloadable!] (restricted)
  8. Bacha, Edmar L., 1990. "A three-gap model of foreign transfers and the GDP growth rate in developing countries," Journal of Development Economics, Elsevier, vol. 32(2), pages 279-296, April. [Downloadable!] (restricted)
  9. Easterly, William & Schmidt-Hebbel, Klaus, 1993. "Fiscal Deficits and Macroeconomic Performance in Developing Countries," World Bank Research Observer, Oxford University Press, vol. 8(2), pages 211-37, July.
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