Could Foreign-Aid Financing Cause Excess Depreciation of Public Capital? Two Simple Hypothetical Cases

Yisheng Bu
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Yisheng Bu: Liberty Mutual Group, Boston, Massachusetts 02116, USA

Economic Analysis and Policy (EAP), 2004, vol. 34, issue 2, pages 189-202

Abstract: This paper examines the possibility that foreign aid financing for public capital accumulation in developing countries may lead to excess depreciation of capital. The depreciation rate on public capital is endogenised in a general equilibrium framework in which the government collects a consumption tax to finance maintenance and repair expenditures as well as public investment. Two simple cases are formulated and analysed to show that excess depreciation of public capital may result from budgetary and international aid and financing distortions that skew allocations to new investment rather than to maintenance of existing capital.

Keywords: Accumulation; Aid; Capital; Expenditure; Foreign Aid; Investment; Public Capital (search for similar items in EconPapers)
JEL-codes: E22 F35 H54 (search for similar items in EconPapers)
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