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

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Listed:
  • Terry McKinley

    () (International Poverty Centre)

Abstract

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.

Suggested Citation

  • Terry McKinley, 2005. "Why is ?The Dutch disease? always a disease? the macroeconomic consequences of scaling up ODA," Working Papers 10, International Policy Centre for Inclusive Growth.
  • Handle: RePEc:ipc:wpaper:10
    as

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    File URL: http://www.ipc-undp.org/pub/IPCWorkingPaper10.pdf
    File Function: First version, 2005
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    References listed on IDEAS

    as
    1. Arvind Subramanian & Raghuram Rajan, 2005. "What Undermines Aid’s Impact on Growth?," IMF Working Papers 05/126, International Monetary Fund.
    2. Christopher S. Adam & David L. Bevan, 2006. "Aid and the Supply Side: Public Investment, Export Performance, and Dutch Disease in Low-Income Countries," World Bank Economic Review, World Bank Group, vol. 20(2), pages 261-290.
    3. World Bank, 2005. "World Development Indicators 2005," World Bank Publications, The World Bank, number 12426.
    4. Yongzheng Yang & Robert Powell & Sanjeev Gupta, 2005. "The Macroeconomic Challenges of Scaling Up Aid to Africa," IMF Working Papers 05/179, International Monetary Fund.
    5. repec:wbk:wbpubs:12425 is not listed on IDEAS
    6. Alexander Pivovarsky & Benedict J. Clements & Sanjeev Gupta & Erwin H Tiongson, 2003. "Foreign Aid and Revenue Response; Does the Composition of Aid Matter?," IMF Working Papers 03/176, International Monetary Fund.
    7. 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.
    8. World Bank, 2004. "World Development Indicators 2004," World Bank Publications, The World Bank, number 13890.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Nuno Baetas da Silva & João Sousa Andrade & António Portugal Duarte, 2016. "Alternative Sources of Dutch Disease: A Survey of the Literature," GEMF Working Papers 2016-10, GEMF, Faculty of Economics, University of Coimbra.
    2. Antonio Estache & Jean-François Perrault & Luc Savard, 2008. "Impact Of Infrastructure Spending In Sub-Saharan Africa: A Cge Modeling Approach," Cahiers de recherche 08-03, Departement d'Economique de l'École de gestion à l'Université de Sherbrooke.
    3. Antonio Estache & Jean-François Perrault & Luc Savard, 2007. "Impact of Infrastructure Spending in Mali: A CGE modeling approach," Cahiers de recherche 07-24, Departement d'Economique de l'École de gestion à l'Université de Sherbrooke.
    4. John Weeks & Terry McKinley, 2006. "Does Debt Relief Increase Fiscal Space in Zambia? The MDG Implications," Country Study 5, International Policy Centre for Inclusive Growth.
    5. Degol Hailu, 2007. "Scaling-up HIV/AIDS Financing and the Role of Macroeconomic Policies in Kenya," Conference Paper 4, International Policy Centre for Inclusive Growth.
    6. Wessel N. Vermeulen, 2011. "External income, De-industrialisation and Labour Mobility," CREA Discussion Paper Series 11-20, Center for Research in Economic Analysis, University of Luxembourg.
    7. repec:wsi:jicepx:v:04:y:2013:i:02:n:s1793993313500099 is not listed on IDEAS
    8. 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.

    More about this item

    Keywords

    Dutch Disease; Official Development Assistance; Macroeconomic policies; Poverty; Africa;

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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