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Gearing macroeconomic polices to manage large inflows of ODA: The implications for HIV/AIDS programmes

Author

Listed:
  • Anis Chowdhury

    () (University of Western Sydney, Australia)

  • Terry McKinley

    () (International Poverty Centre)

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 minimised 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/AIDS related aid because they fear that such an action might appreciate the domestic currency. However, if aid-induced spending on HIV/AIDS programmes minimises the adverse impact of the epidemic on human capabilities, not only would it combat a grave human development crisis but also it could safeguard long-term economic growth. Instead of adhering to restrictive macroeconomic policies, governments could target their increased spending on productivity enhancing public investment and central banks could amplify the flow of low-cost credit to stimulate private investment. If the real exchange rate does begin to appreciate, the central bank can implement means to manage its fluctuations in order to maintain competitiveness. Moreover, if a significant proportion of HIV/AIDS funds is used to directly finance the import of drugs and medical equipment that are not produced domestically (which is often the case), there is likely to be even less impact on inflation or appreciation of the exchange rate.

Suggested Citation

  • Anis Chowdhury & Terry McKinley, 2006. "Gearing macroeconomic polices to manage large inflows of ODA: The implications for HIV/AIDS programmes," Working Papers 17, International Policy Centre for Inclusive Growth.
  • Handle: RePEc:ipc:wpaper:17
    as

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    File URL: http://www.ipc-undp.org/pub/IPCWorkingPaper17.pdf
    File Function: First version, 2006
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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. Ivana Vlková, 2009. "The Effectiveness of Development Assistance as a Means of Increasing the Official Development Assistance Impact," Acta Oeconomica Pragensia, University of Economics, Prague, vol. 2009(3), pages 44-57.

    More about this item

    Keywords

    policies; ODA; HIV/AIDS; Poverty;

    JEL classification:

    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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