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This working paper is part of a research project on macroeconomic policy in low-income countries supported by the UK’s Department for International Development (DFID). We would like to thank Felipe Zanna for his expertise and guidance during this project.
Recall that the purpose of including non-savers into the model is to break Ricardian equivalence. Poor rural workers who save a small fraction of their income in informal microfinance institution are unlikely to behave in a non-Ricardian manner.
This is basically the opposite of Dutch disease, where a country that receives a surge of aid inflows or natural resource revenue sees its manufacturing sector suffer due to the strength of its currency.
Concessional loans are typically negotiated at interest rates below equivalent market-rate (i.e. commercial) loans.
Concessional loans are extended for the first 10 years to finance the buildup, then repaid at 1 percent of GDP in years 11-30.