Aid and the Supply Side : Public Investment, Export Performance, and Dutch Disease in Low-Income Countries
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. In the simple model of aid and public expenditure presented...
| Main Authors: | , |
|---|---|
| Format: | Journal Article |
| Language: | English en_US |
| Published: |
Oxford University Press on behalf of the World Bank
2013
|
| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2013/05/17753020/aid-supply-side-public-investment-export-performance-dutch-disease-low-income-countries http://hdl.handle.net/10986/16442 |
| Summary: | 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. In the simple model of aid
and public expenditure presented here, public infrastructure
generates an inter-temporal productivity spillover, which
may exhibit a sector-specific bias. The model also provides
for a learning-by-doing externality, through which total
factor productivity in the tradable sector is an increasing
function of past export volumes. An extended computable
version of this model is used to simulate the effect of a
step increase in net aid flows. The simulations show that
beyond the short run, when conventional demand-side Dutch
disease effects are present, the relationship between
enhanced aid flows and real exchange rates, output growth,
and welfare is less straightforward than simple models of
aid suggest. Public infrastructure investment that generates
a productivity bias in favor of non-tradable production
delivers the largest aggregate return to aid, but at the
cost of deterioration in the income distribution. Income
gains accrue predominantly to skilled and unskilled urban
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. |
|---|