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Why is ?The Dutch disease? always a disease? the macroeconomic consequences of scaling up ODA

  • Terry McKinley

    ()

    (International Poverty Centre)

Registered author(s):

    This working paper examines the validity of the claim that ?scaling up? ODA in developing countries will cause ?Dutch Disease? effects that slow growth and human development. The most common concerns are increased inflation and exchange-rate appreciation. Consistent with a recent IMF re-appraisal, the paper maintains that such problems can be mitigated if ODA is properly ?spent? and ?absorbed?. However, many governments either do not spend ODA (because of the fear of inflation) or do not ?absorb? it (because of the fear of appreciation). The paper argues that the critical issues are whether 1) increased government spending is focused on public investment and 2) increased imports are focused on capital goods. A central point is that in many developing countries, under-utilized productive capacities can readily respond to rising government demand for domestic goods and services. The paper ends with the warning that although the short-run macroeconomic impact of ODA can be managed, its longer-term impact could, indeed, be adverse if it reduces efforts to mobilize domestic resources, such as public revenue and national savings.

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    File URL: http://www.ipc-undp.org/pub/IPCWorkingPaper10.pdf
    File Function: First version, 2005
    Download Restriction: no

    Paper provided by International Policy Centre for Inclusive Growth in its series Working Papers with number 10.

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    Length: 17
    Date of creation: Nov 2005
    Date of revision:
    Publication status: Published by UNDP - International Poverty Centre, November 2005, pages 1-17
    Handle: RePEc:ipc:wpaper:10
    Contact details of provider: Web page: http://www.ipc-undp.org
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    1. repec:wbk:wbpubs:12426 is not listed on IDEAS
    2. Yongzheng Yang & Robert Powell & Sanjeev Gupta, 2005. "The Macroeconomic Challenges of Scaling Up Aid to Africa," IMF Working Papers 05/179, International Monetary Fund.
    3. Raghuram G. Rajan & Arvind Subramanian, 2005. "What Undermines Aid's Impact on Growth?," NBER Working Papers 11657, National Bureau of Economic Research, Inc.
    4. Mwanza Nkusu, 2004. "Aid and the Dutch Disease in Low-Income Countries; Informed Diagnoses for Prudent Prognoses," IMF Working Papers 04/49, International Monetary Fund.
    5. World Bank, 2004. "World Development Indicators 2004," World Bank Publications, The World Bank, number 13890.
    6. 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.
    7. World Bank, 2005. "World Development Indicators 2005," World Bank Publications, The World Bank, number 12425.
    8. Alexander Pivovarsky & Benedict J. Clements & Sanjeev Gupta & Erwin Tiongson, 2003. "Foreign Aid and Revenue Response; Does the Composition of Aid Matter?," IMF Working Papers 03/176, International Monetary Fund.
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