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Macroeconomic Issues in Foreign Aid


  • Peter Hjertholm

    (Institute of Economics, University of Copenhagen)

  • Jytte Laursen

    (Danish Ministry of Foreign Affairs (Danida))

  • Howard White

    (University of Sussex, IDS)


The macroeconomic rationale for aid relates to its ability to supplem­ent savings, foreign exchange and government revenue, thus contributing to ­growth. This processes presumes a simple ­Harrod-Domar context in which growth is driven by physical capital formation. ­However, the macroeconomic reality of aid is more complicated. Three areas of complication are discussed: (i) the effects of aid on fiscal behaviour, (ii) debt problems and (iii) Dutch disease effects. In the long run, rather than merely filling gaps, aid should help close­ gaps, since reliance on future aid and foreign borrowing is thus diminished and economic policy autonomy is increased. Closing the savings gap entails financial and technical support for mobilisation of domestic savings. Closing the trade gap entails supporting a macro environment conducive to export growth, helping to expand and improve physical infrastructure and direct support for export activities, notably those of a non-traditional nature. Closing the fiscal gap entails support for increasing government revenue and improving expenditure management, which is the more delicate task since donors and recipient governments have to carefully balance the disadvantage of lower-than-needed government spending against the disadvantage of higher, and potentially distortionary, taxation.

Suggested Citation

  • Peter Hjertholm & Jytte Laursen & Howard White, 2000. "Macroeconomic Issues in Foreign Aid," Discussion Papers 00-05, University of Copenhagen. Department of Economics.
  • Handle: RePEc:kud:kuiedp:0005

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    Cited by:

    1. James McHugh & Theodora Kosma & Dimitri G Demekas, 2002. "The Economics of Post Conflict Aid," IMF Working Papers 02/198, International Monetary Fund.
    2. Hodler, Roland & Dreher, Axel, 2013. "Development (paradigm) failures," Journal of Development Economics, Elsevier, vol. 101(C), pages 63-74.
    3. Dao, Minh Quang, 2011. "Debt and Growth in Developing Countries - Debito e crescita nei paesi in via di sviluppo," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 64(2), pages 173-193.

    More about this item


    Foreign Aid; Macroeconomics of Aid; Gap Models; Aid Fungibility; Fiscal Response Models; Foreign Debt; Dutch Disease;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

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