Aid and the Supply Side : Public Investment, Export Performance, and Dutch Disease in Low-Income Countries

By C. Adam, D. Bevan. 2006

236 citations recorded by the source corpus.

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.

Subfields: Development, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/19a67e5fec6bc0882b904b4f3d1f384cd0a90139

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Citations in the corpus

When and Why Worry About Real Exchange Rate Appreciation? The Missing Link Between Dutch Disease and Growth (2013, background): “Amuedo-Dorantes and Pozo (2004), in contrast, find no systematic effect of foreign aid on the real exchange rate.”
Public Investment, Growth, and Debt Sustainability: Putting Together the Pieces (2012, methodology): “More recently, Chatterjee and Turnovsky (2007) and Agenor (2010), among others, have relied on these endogenous growth setups to explore the importance of some LIC-specific features for the public capital accumulation and growth nexus.”
Current Debates on Infrastructure Policy (2007, unknown): “A particularly interesting analysis of the differing impact of infrastructure investments between rural and urban poor comes from Adam and Bevan (2004). They show that infrastructure investments in Uganda that support tradables have different impacts on the distribution of poverty be”
Who Benefits from Aid for Trade? Comparing the Effects on Recipient versus Donor Exports (2014, background): “Furthermore, Adam and Bevan (2006) show that the relationship between aid inflows, real exchange rates, output growth, and recipient exports is less straightforward than simple models of aid suggest; export-depressing Dutch disease effects tend to be dominated by positive supply-side effects when lo”
Infrastructure: A survey of recent and upcoming issues (2006, background): “The CGE literature on the effects of public infrastructure service reform is rather modest: Adam and Bevans (2004) for Uganda, Boccanfusso et al. (2006) for Senegal, Chisari and his colleagues (1999, 2003) and Navajas (2000) for Argentina, Andersen and Faris (2002) for natural gas in Bolivia, and Lo”
Challenges and Opportunities for Resource Rich Economies (2006, unknown): “…adverse effects of the Dutch disease on economic growth are 4 These explanations of the Dutch disease also explain why giving aid to developing countries may lead to an appreciation of the real exchange rate and a decline of manufacturing (e.g., Adam and Bevan, 1999, 2004; Adam and Connell, 2004).”
Natural Resources: Curse or Blessing? (2011, background): “…hamper learning by doing, and thus stunt economic growth (Jeffrey D. Sachs and Andrew M. Warner 5 Similarly, giving aid to developing countries may lead to appreciation of the real exchange rate and decline of manufacturing (Christopher S. Adam and Bevan 2006; Adam and Stephen O’Connell 2004).”
Does aid for trade enhance export performance? Investigating on the infrastructure channel (2012, background): “Nevertheless, Adam and Bevan (2006) find that this short-run negative impact can be offset in the medium term by potential productivity spillovers created by aid-financed public expenditures.”