Abstract
This handbook provides a checklist of the macroeconomic challenges that low-income countries are likely to face if they begin to receive significantly higher official development assistance (ODA) than in the recent past. The checklist, which is derived from a survey of the economic literature, is a tool for developing illustrative macroeconomic scenarios for individual countries in response to a scaling up of aid flows. For example, one scaling-up scenario might involve a doubling of official resource transfers as a share of a recipient country’s GDP, with higher aid flows being sustained for a decade or more.
Abstract
A key issue in assessing the macroeconomic implications of scaling up official resource transfers to Africa is the potential impact on the real exchange rate, exports, and competitiveness. Standard analysis suggests that foreign aid flows augment domestic resources and therefore leave the economy, as a whole, better off. In practice, however, the macroeconomic impact of aid depends both on how a country spends the resources and on its policy response. The interaction of fiscal policy with monetary and exchange rate management is key. To highlight this interaction, IMF (2005d) discusses two related but distinct concepts: absorbing aid and spending aid.
Abstract
If the monetary authorities are concerned with the liquidity impact of increases in aid-induced spending, they can sterilize the liquidity injection either domestically or through foreign exchange sales.
Abstract
Any scaling-up scenario needs to take into account the possible effects of aid on revenues. The associated policy package should stress the need to maintain or strengthen revenues during the period of higher aid, both to guard against uncertain donor behavior and to prepare for an eventual tapering off of aid flows.
Abstract
The debate about the effectiveness of aid in stimulating growth goes back many years, yet there remains considerable uncertainty about the aid-growth relationship. Some researchers suggest that there is either no effect or a negative one; others suggest a positive effect, but with diminishing returns. Still others argue that aid works to promote growth in some circumstances (when a country has good policies), but not in others.
Abstract
Fiscal policy can become more complicated in a high-aid environment (Heller,2005), and this section considers a number of fiscal issues that may need to be considered in a scaling-up scenario.
Abstract
There is a growing consensus that good governance is essential if higher aid flows are to be effective in promoting growth and reducing poverty.25 Major donors have made this point, most recently at the July 2005 summit of the Group of Eight countries in Gleneagles, Scotland (Group of Eight, 2005). Strengthening governance therefore will likely increase the probability that donors will actually disburse the higher aid flows promised in the new scaling-up programs.26