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Aid, Public Expenditure and Dutch Disease
Christopher
S.
Adam,
CSAE
David
L.
Bevan,
Economics Department, University of Oxford
ABSTRACT:
Abstract
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. We develop a simple model of aid and public expenditure in which public infrastructure capital generates an inter-temporal productivity spillover for both tradable and non-tradable sectors, where these productivity effects may display sector-specific biases. The model also allows for non-homothetic demands. We then use an extended version of this model, calibrated to contemporary conditions in Uganda, to simulate the effect of a step increase in net aid flows. Our simulations show that beyond the short-run, where Dutch disease effects are present, the relationship between enhanced aid flows, real exchange rates and welfare is less straightforward than simple models of aid suggest. We show that public infrastructure which generates a productivity bias in favour of non-tradable production delivers the largest aggregate return to aid, with the real exchange rate appreciation reduced or reversed and enhanced export performance, but it does so at the cost of a deterioration in the income distribution. Income gains accrue predominantly to urban skilled and unskilled households, leaving the rural poor relatively worse off. Under plausible parameterizations of the model the rural poor may also be worse of in absolute terms.
SUGGESTED CITATION:
Christopher S. Adam and David L. Bevan,
" Aid, Public Expenditure and Dutch Disease "
(August 20, 2003).
The Centre for the Study of African Economies Working Paper Series.
Working Paper 184.
http://www.bepress.com/csae/paper184
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