Macroeconomic Issues in Foreign Aid

Peter Hjertholm, Jytte Laursen and Howard White
Additional contact information
Peter Hjertholm: Institute of Economics, University of Copenhagen
Jytte Laursen: Danish Ministry of Foreign Affairs (Danida)

No 00-05, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: The macroeconomic rationale for aid relates to its ability to supplem­ent savings, foreign exchange and government revenue, thus contributing to ­growth. This processes presumes a simple ­Harrod-Domar context in which growth is driven by physical capital formation. ­However, the macroeconomic reality of aid is more complicated. Three areas of complication are discussed: (i) the effects of aid on fiscal behaviour, (ii) debt problems and (iii) Dutch disease effects. In the long run, rather than merely filling gaps, aid should help close­ gaps, since reliance on future aid and foreign borrowing is thus diminished and economic policy autonomy is increased. Closing the savings gap entails financial and technical support for mobilisation of domestic savings. Closing the trade gap entails supporting a macro environment conducive to export growth, helping to expand and improve physical infrastructure and direct support for export activities, notably those of a non-traditional nature. Closing the fiscal gap entails support for increasing government revenue and improving expenditure management, which is the more delicate task since donors and recipient governments have to carefully balance the disadvantage of lower-than-needed government spending against the disadvantage of higher, and potentially distortionary, taxation.

Keywords: Foreign Aid; Macroeconomics of Aid; Gap Models; Aid Fungibility; Fiscal Response Models; Foreign Debt; Dutch Disease (search for similar items in EconPapers)
JEL-codes: F34 F35 O10 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2000-03
New Economics Papers: this item is included in nep-dev, nep-ifn, nep-mac and nep-pke
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Citations: View citations in EconPapers (6)

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