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Development expenditures and the local financing constraint


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  • Agbonyitor, Albert D. K.
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    Focusing on the local financing constraint sheds new light on issues of aid, fiscal reform, and the management of public spending. The fungibility of aid need not translate into resource flows to fill the local financing gap. Indeed, project aid can widen the local financing gap. To augment direct local financing of development, aid must be nonproject aid that can generate local currency. In the longer term, project aid's effect on local financing lies in its impact on growth and on expanding the base for tax revenues, seigniorage, and borrowing. When inadequate local financing limits project implementation and effective use of aid, local currency funds are more valuable than project aid, at the margin--and it becomes important to reallocate local funds, to leverage project aid, and to raise the quality of investment projects. A persistent gap in local financing complicates programs of fiscal reform. For such programs to be effective, the local financing gap has to be confronted directly by matching planned local fund expenditures against expected local fund receipts. This requires a transparent database to develop indicators and to monitor the allocation and use of local resources.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1907.

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    Date of creation: 30 Apr 1998
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    Handle: RePEc:wbk:wbrwps:1907

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    Keywords: Development Economics&Aid Effectiveness; Economic Theory&Research; Environmental Economics&Policies; Payment Systems&Infrastructure; Fiscal&Monetary Policy; Environmental Economics&Policies; Development Economics&Aid Effectiveness; National Governance; Fiscal&Monetary Policy; Economic Theory&Research;


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    1. Bruton, Henry J, 1969. "The Two Gap Approach to Aid and Development: Comment," American Economic Review, American Economic Association, vol. 59(3), pages 439-46, June.
    2. Pack, Howard & Pack, Janet Rothenberg, 1990. "Is Foreign Aid Fungible? The Case of Indonesia," Economic Journal, Royal Economic Society, vol. 100(399), pages 188-94, March.
    3. Fischer, Stanley & Easterly, William, 1990. "The Economic of the Government Budget Constraint," World Bank Research Observer, World Bank Group, vol. 5(2), pages 127-42, July.
    4. Levy, Victor, 1987. "Anticipated Development Assistance, Temporary Relief Aid, and," Economic Journal, Royal Economic Society, vol. 97(386), pages 446-58, June.
    5. Schmidt-Hebbel, Klaus & Serven, Luis & Solimano, Andres, 1996. "Saving and Investment: Paradigms, Puzzles, Policies," World Bank Research Observer, World Bank Group, vol. 11(1), pages 87-117, February.
    6. Baumol, William J, 1972. "Macroeconomics of Unbalanced Growth: Reply," American Economic Review, American Economic Association, vol. 62(1), pages 150, March.
    7. Heller, Peter S, 1974. "Public Investment in LDC'S with Recurrent Cost Constraint: The Kenyan Case," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 251-77, May.
    8. Over, A. Mead, 1981. "On the care and feeding of a gift horse: The recurrent cost problem and optimal reduction of recurrent inputs," MPRA Paper 10405, University Library of Munich, Germany.
    9. Taylor, Lance, 1993. "The rocky road to reform: Trade, industrial, financial, and agricultural strategies," World Development, Elsevier, vol. 21(4), pages 577-590, April.
    10. Christ, Carl F, 1979. "On Fiscal and Monetary Policies and the Government Budget Restraint," American Economic Review, American Economic Association, vol. 69(4), pages 526-38, September.
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