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Aid, Public Expenditure and Dutch Disease

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  • Christopher S. Adam
  • David L. Bevan

Abstract

Contemporary policy debates on the macroeconomics of aid often concentrate on short-run Dutch disease effects, ignoring the possible supply side impact of aid-financed public expenditure. We develop a simple model of aid and public expenditure in which public infrastructure capital generates an inter-temporal productivity spillover for both tradable and non-tradable sectors, where these productivity effects may display sector-specific biases. The model also allows for non-homothetic demands. We then use an extended version of this model, calibrated to contemporary conditions in Uganda, to simulate the effect of a step increase in net aid flows. Our simulations show that beyond the short-run, where Dutch disease effects are present, the relationship between enhanced aid flows, real exchange rates and welfare is less straightforward than simple models of aid suggest. We show that public infrastructure which generates a productivity bias in favour of non-tradable production delivers the largest aggregate return to aid, with the real exchange rate appreciation reduced or reversed and enhanced export performance, but it does so at the cost of a deterioration in the income distribution. Income gains accrue predominantly to urban skilled and unskilled households, leaving the rural poor relatively worse off. Under plausible parameterizations of the model the rural poor may also be worse off in absolute terms.

Suggested Citation

  • Christopher S. Adam & David L. Bevan, 2003. "Aid, Public Expenditure and Dutch Disease," CSAE Working Paper Series 2003-02, Centre for the Study of African Economies, University of Oxford.
  • Handle: RePEc:csa:wpaper:2003-02
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    References listed on IDEAS

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    1. Sachs, J-D & Warner, A-M, 1995. "Natural Resource Abundance and Economic Growth," Papers 517a, Harvard - Institute for International Development.
    2. Torvik, Ragnar, 2001. "Learning by doing and the Dutch disease," European Economic Review, Elsevier, vol. 45(2), pages 285-306, February.
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    5. Devarajan, Shantayanan & Lewis, Jeffrey D & Robinson, Sherman, 1993. "External Shocks, Purchasing Power Parity, and the Equilibrium Real Exchange Rate," World Bank Economic Review, World Bank Group, vol. 7(1), pages 45-63, January.
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    7. van Wijnbergen, Sweder J G, 1984. "The 'Dutch Disease': A Disease after All?," Economic Journal, Royal Economic Society, vol. 94(373), pages 41-55, March.
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    Citations

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    Cited by:

    1. Katerina Kalcheva & Nienke Oomes, 2007. "Diagnosing Dutch Disease; Does Russia Have the Symptoms?," IMF Working Papers 07/102, International Monetary Fund.
    2. Eun K Choi, 2005. "Infrastructure Aid, Deindustrialization, and Welfare," IMF Working Papers 05/150, International Monetary Fund.
    3. repec:unu:wpaper:wp2012-26 is not listed on IDEAS
    4. Margaret Chitiga & Ramos Mabugu & Hélène Maisonnave, 2016. "Analysing job creation effects of scaling up infrastructure spending in South Africa," Development Southern Africa, Taylor & Francis Journals, vol. 33(2), pages 186-202, March.
    5. David Fielding & Fred Gibson, 2013. "Aid and Dutch Disease in Sub-Saharan Africa," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 22(1), pages 1-21, January.
    6. Arellano, Cristina & Bulír, Ales & Lane, Timothy & Lipschitz, Leslie, 2009. "The dynamic implications of foreign aid and its variability," Journal of Development Economics, Elsevier, vol. 88(1), pages 87-102, January.
    7. Buffie, Edward & Adam, Christopher & O'Connell, Stephen & Pattillo, Catherine, 2008. "Riding the wave: Monetary responses to aid surges in low-income countries," European Economic Review, Elsevier, vol. 52(8), pages 1378-1395, November.
    8. World Bank, 2007. "Ethiopia - Accelerating Equitable Growth : Country Economic Memorandum, Volume 1. Overview," World Bank Other Operational Studies 7991, The World Bank.
    9. Bernard Walters, 2007. "The Fiscal Implications of Scaling up ODA to Deal with the HIV/AIDS Pandemic," Conference Paper 3, International Policy Centre for Inclusive Growth.
    10. Alessandro Prati & Thierry Tressel, 2006. "What is the Most Effective Monetary Policy for Aid-Receiving Countries?," Working Papers 12, United Nations, Department of Economics and Social Affairs.
    11. Li, Ying & Rowe, Francis, 2007. "Aid inflows and the real effective exchange rate in Tanzania," Policy Research Working Paper Series 4456, The World Bank.
    12. David Fielding, 2007. "Aid and Dutch Disease in the South Pacific," Working Papers 0703, University of Otago, Department of Economics, revised Feb 2007.
    13. Abegaz, Berhanu, 2005. "Multilateral development aid for Africa," Economic Systems, Elsevier, vol. 29(4), pages 433-454, December.
    14. Al-mulali, Usama & Che Sab, Normee, 2010. "Oil Shocks and Kuwait’s Dinar Exchange Rate: the Dutch Disease Effect," MPRA Paper 26844, University Library of Munich, Germany.
    15. Buffie, Edward F. & O'Connell, Stephen A. & Adam, Christopher, 2010. "Fiscal inertia, donor credibility, and the monetary management of aid surges," Journal of Development Economics, Elsevier, vol. 93(2), pages 287-298, November.
    16. Strand, Jon, 2009. ""Revenue management"effects related to financial flows generated by climate policy," Policy Research Working Paper Series 5053, The World Bank.
    17. João Sousa Andrade & António Portugal Duarte, 2013. "The Dutch Disease in the Portuguese Economy," GEMF Working Papers 2013-05, GEMF, Faculty of Economics, University of Coimbra.
    18. Thierry Tressel & Alessandro Prati, 2006. "Aid Volatility and Dutch Disease; Is There a Role for Macroeconomic Policies?," IMF Working Papers 06/145, International Monetary Fund.
    19. International Monetary Fund, 2010. "When and Why Worry About Real Exchange Rate Appreciation? The Missing Link Between Dutch Disease and Growth," IMF Working Papers 10/271, International Monetary Fund.

    More about this item

    Keywords

    Aid; Dutch Disease; Public Expenditure; Africa;

    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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