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

Christopher S. Adam and David Bevan

The World Bank Economic Review, 2006, vol. 20, issue 2, 261-290

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. In the simple model of aid and public expenditure presented here, public infrastructure generates an intertemporal 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 nontradable production delivers the largest aggregate return to aid, but at the cost of a 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. Copyright 2006, Oxford University Press.

Date: 2006
References: Add references at CitEc
Citations: View citations in EconPapers (112)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Working Paper: Aid and the Supply Side: Public Investment, Export Performance and Dutch Disease in Low Income Countries (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:wbecrv:v:20:y:2006:i:2:p:261-290

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

The World Bank Economic Review is currently edited by Eric Edmonds and Nina Pavcnik

More articles in The World Bank Economic Review from World Bank Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().