Aid and Macroeconomic Performance

by White, Howard

• ISBN13: 9780312212643
• ISBN10: 031221264X
• Format: Hardcover
• Copyright: 1998-03-01
• Publisher: Palgrave Macmillan

Summary

The growth models of the 1960s ascribed a central role to aid in the development process. Thirty years later donors and the public alike are disillusioned. Many academics even argue that aid has been harmful. The first half of this book is a rigorous, systematic and up to date review of the theoretical and empirical debates about aid's macroeconomic impact. It is argued that a proper understanding of the various channels through which aid affects the macroeconomy requires careful analysis of the links between aid, the policy environment and economic performance at the country level. The second part of the book comprises four country case studies: Guinea-Bissau, Nicaragua, Tanzania and Zambia. The authors examine the impact aid has on a range of key macroeconomic aggregates -- savings, investment, imports, exports and the government budget -- and show aid has a significant impact on both the level and composition of most of these variables, enabling aid to make a positive contribution to these countries' development.

Table of Contents

List of Tables and Figures	xi	(4)
Series Editor's Introduction	xv	(6)
Editor's Preface	xxi
Part I INTRODUCTION	3	(16)
Howard White
1 Introduction	3	(16)
1.1 Introduction	3	(1)
1.2 The Macroeconomic Analysis of Aid: A Review of the Major Issues	4	(9)
1.2.1 The macroeconomics of aid flows	4	(4)
1.2.2 Macroeconomic effects of aid-supported policies	8	(2)
1.2.3 The importance of different types of aid	10	(1)
1.2.4 Aid, poverty alleviation and human development	11	(2)
1.3 Structure of this Book and Background to the Study	13	(2)
Notes	15	(1)
References	16	(3)
Part II THEORY AND EMPIRICAL EVIDENCE	19	(90)
Howard White
2 Literature Review	19	(33)
2.1 Introduction	19	(1)
2.2 An Accounting Framework and Theoretical Debates	19	(14)
2.2.1 Fungibility	20	(1)
2.2.2 The capital and current accounts	20	(3)
2.2.3 Internal and external balance	23	(4)
2.2.4 Aid, income and output	27	(5)
2.2.5 Aid dependence	32	(1)
2.3 Empirical Analyses of Aid's Macroeconomic Impact	33	(11)
2.3.1 Aid, imports and fungibility	33	(1)
2.3.2 Aid and the real exchange rate	34	(1)
2.3.3 Aid and aggregate savings	35	(2)
2.3.4 Aid and investment	37	(1)
2.3.5 Empirical estimation of the fiscal response model	38	(1)
2.3.6 Categorical fungibility of aid to specific sectors	39	(4)
2.3.7 Simultaneous equation models	43	(1)
2.3.8 The efficiency of investment	44	(1)
2.4 Summary	44	(1)
Notes	45	(1)
References	46	(6)
3 Aid-supported Policy Reform	52	(17)
3.1 Introduction	52	(1)
3.2 Does Aid Affect Policy?	53	(3)
3.3 Modelling the Macroeconomic Impact of Policy Changes	56	(8)
3.3.1 Distinguishing adjustment from adjustment policies	56	(1)
3.3.2 Measuring adjustment	57	(2)
3.3.3 Single equation models	59	(2)
3.3.4 Reviewing the results	61	(2)
3.3.5 Aid-supported policies versus aid monies	63	(1)
3.4 Summary	64	(1)
Notes	65	(1)
References	65	(4)
4 Different Types of Aid	69	(40)
4.1 Introduction	69	(1)
4.2 Project Aid	69	(2)
4.3 Programme Aid I: Debt Relief	71	(3)
4.4 Programme Aid II: Import Support, Counterpart Funds and Budget Aid	74	(8)
4.4.1 Import composition	74	(3)
4.4.2 Aggregate fungibility	77	(1)
4.4.3 Displacement of domestic production	78	(1)
4.4.4 Counterpart funds	79	(3)
4.4.5 Budget aid	82	(1)
4.5 Food Aid and Disincentive Effects	82	(3)
4.6 Technical Assistance (TA) and the Displacement of Skilled Labour	85	(2)
4.7 Summary	87	(2)
Notes	89	(2)
References	91	(4)
Appendix A4: A Three-gap Model of Aid Impact	95	(14)
Part III CASE STUDIES	109	(152)
5 Guinea-Bissau	109	(30)
Mario Zejan
Ari Kokko
5.1 Introduction	109	(1)
5.2 Economic Reforms Since Independence	110	(6)
5.2.1 The Economic Recovery Programme, 1983-85	112	(1)
5.2.2 The Structural Adjustment Programme (SAP)	112	(3)
5.2.3 Results of the structural reforms and the role of foreign aid	115	(1)
5.3 The Macroeconomic Effects of Aid	116	(16)
5.3.1 Data sources and data availability	116	(1)
5.3.2 External balance: the current account and the capital account	117	(2)
5.3.3 Aid and exports	119	(4)
5.3.4 Aid and imports	123	(1)
5.3.5 Aid and other components in the current and capital accounts	124	(1)
5.3.6 Internal balance: The savings-investment gap and the current account	124	(1)
5.3.7 Aid and investment	125	(3)
5.3.8 Aid and the government budget	128	(4)
5.4 Conclusions and Recommendations	132	(4)
5.4.1 Summary of findings	132	(2)
5.4.2 Policy implications	134	(2)
Notes	136	(1)
References	137	(2)
6 Nicaragua	139	(56)
Rob Vos
Sara Johansson
6.1 The Macroeconomic Importance of Aid to Nicaragua	139	(2)
6.2 Economic Development in Perspective	141	(5)
6.3 Shifting Patterns of Aid	146	(5)
6.4 Aid and External Debt	151	(2)
6.5 The Macroeconomics of Aid to Nicaragua	153	(22)
6.5.1 Aid and economic growth	153	(2)
6.5.2 An accounting framework	155	(1)
6.5.3 Aid and import capacity	156	(5)
6.5.4 Imports and economic growth	161	(5)
6.5.5 The fiscal response to aid inflows	166	(9)
6.6 Conclusions and Policy Recommendations	175	(3)
Notes	178	(3)
References	181	(3)
Appendices	184	(11)
A6.1 Decomposition of Import Capacity	184	(4)
A6.2 The Link between Investment and Growth	188	(2)
A6.3 Fiscal Response to Aid: Some Econometric Evidence	190	(5)
7 Tanzania	195	(27)
Joshua Doriye
Howard White
Marc Wuyts
7.1 Introduction	195	(1)
7.2 Capital Inflows to Tanzania	195	(3)
7.3 Accounting for Aid in the Tanzanian Economy	198	(7)
7.4 Impact of Aid on Economic Development	205	(7)
7.5 Policy Changes Under Two Aid Booms	212	(6)
7.5 Conclusions	218	(1)
Notes	219	(1)
References	220	(2)
8 Zambia	222	(39)
Howard White
Tove Edstrand
8.1 Introduction	222	(1)
8.2 Macroeconomic Policy and Performance in Zambia	223	(13)
8.2.1 Economic policy in the years following independence	223	(3)
8.2.2 The failure to adjust	226	(2)
8.2.3 A decade of failed reforms: The 1980s	228	(5)
8.2.4 Adjustment in the 1990s	233	(3)
8.2.5 Summary and conclusion	236	(1)
8.3 The Macroeconomic Effects of Aid	236	(15)
8.3.1 The debt problem	238	(2)
8.3.2 Aid and adjustment	240	(2)
8.3.3 Econometric analysis	242	(3)
8.3.4 The behavioural impact of aid	245	(6)
8.4 Conclusions	251	(1)
Notes	252	(1)
References	252	(3)
Appendix A8: Application of Three-gap Model Data and Model Calibration	255	(6)
Part IV CONCLUSIONS	261	(33)
9 Conclusions	261	(33)
Rob Vos
Howard White
9.1 Introduction	261	(1)
9.2 Macroeconomic Effects of Aid Monies	262	(13)
9.2.1 Changing patterns of aid flows	262	(2)
9.2.2 Limitations to the analysis	264	(1)
9.2.3 Aid and external balance	264	(4)
9.2.4 Aid and internal balance	268	(4)
9.2.5 Import support	272	(2)
9.2.6 Aid dependence	274	(1)
9.3 Aspects of Adjustment Policies	275	(6)
9.3.1 Stabilization and adjustment	276	(1)
9.3.2 Credibility, sustainability and donor support	277	(1)
9.3.3 Ownership and commitment	278	(3)
9.4 Aid's Social Effects	281	(4)
9.5 Conclusions	285	(5)
Notes	290	(1)
References	291	(3)
Index	294