Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Thorvaldur Gylfason Pretoria, South Africa 9-20 July 2007 Definitions, motivations, trends Aid effectiveness Theory and evidence Macroeconomic dangers of aid Dutch disease Aid volatility Policy options in managing aid flows Preparing for scaling up aid Monetary policy options Fiscal challenges and debt sustainability Strengthening governance Conclusions and guidelines Development aid Unrequited transfers from donor to country designed to promote the economic and social development of the recipient (excluding commercial deals and military aid) Concessional loans and grants included, by tradition Grant element ≥ 25% Development Public aid can be or private Bilateral (from one country to another) or multilateral (from international organizations) Program, project, technical assistance Linked to purchase of goods and services from donor country, or in kind Conditional in nature IMF conditionality, good governance Moral duty Neocolonialism Humanitarian intervention Public good National Like education and health care International Social justice to promote world unity UN aid commitment of 0.7% of GDP World-wide redistribution Increased inequality word-wide Marshall Plan after World War II 1.5% of US GDP for four years vs. 0.2% today People at www.irenkenya.com in Nairobi disagree Objectives Individuals in donor countries vs. governments in recipient countries Who should receive the aid? Today’s poor vs. tomorrow’s poor Aid for consumption vs. investment Conflicts Beneficiaries’ needs Donors’ interests Aid is a recent phenomenon Four major periods since 1950 1950s: Fast growth (US, France, UK) 1960s: Stabilization and new donors Japan, Germany, Canada, Australia 1970s: Rapid growth in aid again due to oil shocks, recession, cold war 1980s: Stagnation, aid fatigue, new methods United States: largest donor in volume, but low in relation to GDP 2% of GDP Japan: second-largest donor in volume Nordic countries, Netherlands Major donors to multilateral programs Only countries whose assistance accounts for 0.7% of GDP EU: leading multilateral donor 40 35 1985 1990 2000 30 25 20 15 10 5 0 sub-Saharan Africa Asia Oceania MEDA Latin America Europe 12 The Blair Report and the Sachs Report called on world community to increase development aid (particularly for Africa) to enable developing countries to attain the MDGs by 2015 2005 G-8 Gleneagles communiqué called for raising annual aid flows to Africa by $25 billion per year by 2010 2005 UN Millennium Project called for $33 billion per year in additional resources For comparison, US gave $20 billion in 2004, not $70 billion as suggested by UN goal Aid fills gap between investment needs and saving and increases growth Poor countries often have low savings and low export receipts and limited investment capacity and slow growth Aid is intended to free developing nations from poverty traps Example: Capital stock declines if saving does not keep up with depreciation To understand the link between aid and investment, consider resource constraint identity by rearranging the National Income Identity: Y=C+I+G+X–Z I = (Y – T – C) + (T – G) + (Z – X) In words, investment is financed by the sum of private saving, public saving, and foreign saving Rearrange again: Y+Z=E+X where E is expenditure E=C+I+G Thus, total supply Y + Z equals total demand E + X Aid increases recipient’s ability to import: Z rises with increased X o Is it feasible to lift all above a dollar a day? o How much would it cost to eradicate extreme poverty? Let’s do the arithmetic a la Sachs o Number of people with less than a dollar a day is 1.1 billion o Their average income is 77 cents a day, they need 1.08 dollars o Difference is 31 cents a day, or 113 dollars per year o Total cost is 124 billion dollars per year, or 0.6% of GNP in industrial countries o Less than they promised! – and didn’t deliver Regression analysis to measure the impact of aid on Saving Investment Public finance Economic growth Saving Negative effect on saving Substitution effect? Boone, 1996; Reichel, 1995 Positive effect for good performers E.g., South-East Asia, Botswana Investment No impact on private investment Positive impact for good performers Public finance Uncertain effect on public investment Positive effect on public consumption Growth: Mixed results Most early studies showed no statistically significant impact Some more recent studies show negative impact Bias and endogeneity issues Need to distinguish between different types of aid Leakages, cash vs. aid in kind aid has sometimes been compared to natural resource discoveries Aid and growth are inversely related across countries Cause and effect 156 countries, 1960-2000 Per capita growth adjusted for initial income (%) Foreign r = rank correlation r = -0.36 6 4 2 0 -2 -4 -6 -8 -20 0 20 40 60 Foreign aid (% of GDP) 80 Examples Rajan and Subramanian (2005) No robust relationship between aid and growth Burnside of recent studies and Dollar (2001) Aid works in “countries with good policies” Clemens, Radelet, and Bhavnani (2005) Aid works if measured correctly Distinction between fast impact aid (infrastructure projects) and slow impact aid (education) Financial vs. social returns Empirical evidence Types of aid Diminishing returns and limits to domestic absorptive capacity Interaction with governance and good policies Post-conflict situations Aid leads to corruption Aid tends to be misused Svenson (2000) Murshed and Sen (1995) Aid is badly distributed, sometimes for strategic reasons Alesina and Dollar (2000) Collier and Dollar (2002) Aid increases public consumption, not investment Aid is procyclical When Aid it rains, it pours leads to “Dutch disease” Labor intensive and export industries contract relative to other industries in countries receiving high aid inflows Growth is perhaps not the best yardstick for the usefulness of aid Appreciation of currency in real terms, either through inflation or nominal appreciation, leads to a loss of export competitiveness In 1960s, Netherlands discovered natural resources (gas deposits) Currency appreciated Exports of manufactures and services suffered, but not for long Not unlike natural resource discoveries, aid inflows could trigger the Dutch Disease in receiving countries Review theory of Dutch disease in two rounds Demand and supply model Two-sector model Demand effects Supply effects Exchange rate volatility Real exchange rate Payments for imports of goods, services, and capital Imports Earnings from exports of goods, services, and capital Exports Foreign exchange eP Q P* Devaluation or depreciation of e makes Q also depreciate unless P rises so as to leave Q unchanged Q = real exchange rate e = nominal exchange rate P = price level at home P* = price level abroad eP Q P* 1. Suppose e falls Then more lira per dollar, so X rises, Z falls 2. Suppose P falls Then X rises, Z falls 3. Suppose P* rises Then X rises, Z falls Summarize all three by supposing that Q falls Then X rises, Z falls Real exchange rate Aid leads to appreciation and thus reduces exports C B A Imports Exports plus aid Exports Foreign exchange Real exchange rate Oil discovery leads to appreciation and reduces nonoil exports C B A Imports Exports plus oil Exports Foreign exchange Real exchange rate Composition of exports matters C B A Imports Exports plus oil Exports Foreign exchange Dutch disease is a real phenomenon, not monetary Real exchange rate always floats Recall: Q = eP/P* Flexible exchange rate regime Nominal appreciation Fixed exchange rate regime Inflation Look at this more closely in two-sector model of traded vs. nontraded goods Traded goods (T) Production frontier (supply) Nontraded goods (N) Traded goods (T) Indifference curve (demand) Equilibrium Production frontier (supply) Nontraded goods (N) T Indifference curve (demand) Price line, slope = -PN/PT = -Q Equilibrium Production frontier (supply) N Increased demand for N PN/PT rises (appreciation) Supply of N increases, supply of T falls T T = ON = AE Slope = -PN/PT N = OA Cannot add T and N Convert T into units of N E AE/AB = PN/PT AB = AE(PT/PN) = PTT/PN Y = N + PTT/PN = OA + AB Y = N + T/Q N O A B N T Production frontier: T = a – 0.5bN2 a E (2a/b)0.5 Increase in a Increase in b Tangency at E: dT/dN = -bN = -Q N = Q/b (supply) N a and b are indicators of efficiency, inefficiency Increase in Tmax and Nmax Decrease in Nmax T Indifference curve: U = T + ln(N) a E (2a/b)0.5 Tangency at E: 0 = dT + (1/N)dN dT/dN = -1/N = -Q N = 1/Q (demand) N T a E Equilibrium at E: Supply = demand Q/b = 1/Q Q = b0.5 (2a/b)0.5 T = a – 0.5b(b-0.5)2 = a – 0.5 N Supply: N = Q/b = b0.5/b = b-0.5 Demand: N = 1/Q = 1/b0.5 = b-0.5 T Suppose aid increases demand for N by q%: N* = (1+q)/Q = Q/b Q2 = b(1+q) Q = [b(1+q)]0.5 N* = (1+q)/[b(1+q)]0.5 = [(1+q)/b)]0.5 dN*/dq > 0 N T = a – 0.5b[(1+q)/b]-0.5)2 = a – 0.5(1+q) dT/dq < 0 T So, in this case, aid reduces GDP Without aid: Y = N + T/Q = b-0.5 + (a–0.5)b-0.5 = (a+0.5)b-0.5 With aid: Y = N* + T/Q = [(1+q)/b)]0.5 + [a – 0.5(1+q)]/[b(1+q)]0.5 = …N = [a+0.5(1+q)]/[b(1+q)]0.5 Can we sign dY/dq? Yes! dY/dq = -0.5bQ-3T < 0 Aid It is likely to lead to Dutch disease if leads to high demand for nontradables Trade restrictions Recipient country uses aid to buy nontradables (including social services) rather than imports Production is at full capacity Production of nontradables cannot be increased without raising wages in that sector Aid is not used to build up infrastructure and relax supply constraints Price and wage increases in nontradables sector lead to strong wage pressure in tradables sector Aid It is likely to lead to Dutch disease if leads to high demand for nontradables Trade restrictions Recipient country uses aid to buy nontradables (including social services) rather than imports Production is at full capacity Production of nontradables cannot be increased without raising wages in that sector Aid is not used to build up infrastructure and relax supply constraints Price and wage increases in nontradables sector lead to strong wage pressure in tradables sector Aid spending can take several forms, with different macroeconomic implications: Case 1: Aid received is saved by recipient country government Case 2: Aid is used to purchase imported goods that would not have been purchased otherwise (grants in kind) Case 3: Aid is used to buy nontradables with infinitely elastic supply Case 4: Aid is used to buy nontradables for which there are supply constraints Studies assessing empirical relevance of Dutch disease as caused by aid flows have produced mixed results Aid was associated with real appreciation in Malawi and Sri Lanka Aid was associated with with real depreciation in Ghana, Nigeria, and Tanzania Aid is volatile and unpredictable Aid flows are 6-40 times more volatile than fiscal revenue Volatility is largest for aid dependent countries (Bulir and Hamann, 2005) Volatility increased in the 1990s Aid delivery falls short of pledges by over 40% Reasons Donors: Changes in priorities; administrative and budgetary delays Recipients: Failure to satisfy conditions Impact of large sudden inflows Supply constraints in absorbing aid Real exchange rate overshooting and volatility Negative impact on export industries Ratcheting up spending commitments without adequate consideration of exit strategy Infrastructure investment without adequate planning for recurrent expenditure Impact of aid promised, but not disbursed Spending commitments cannot be financed Volatility in money supply, inflation, and exchange rates Domestic sterilization Sale of domestic bond instruments Reserve requirements Central government deposits Sale of foreign exchange Objectives and economic impact of policies Nominal exchange rate vs. inflation Domestic interest rates Options to reduce risk of Dutch disease Save resources Use aid to purchase imported goods Spend on non-traded sectors with few supply constraints Other spending options Spend on nontradables with supply constraints Infrastructure spending for future growth Social spending for poverty reduction Balancing growth and poverty reduction Growth effects from infrastructure investment Targeting spending to the poor Dutch disease Improving NGO coordination activities Subnational government activities Private sector capacity Advantages of grants Lower debt burden Useful for social projects with uncertain or delayed returns (health care, education) Advantage Increase of concessional loans total flow of resources Project allocation Increase debt management capacity Useful for projects yielding quick returns (infrastructure) Loans vs. grants Assessing external debt dynamics Assessing fiscal debt sustainability DSA framework for ensuring debt sustainability Debt and debt-service thresholds Public enterprises; net vs. gross debt; risk of distress Strengthening debt management Negative impact on budgeting, planning, and stabilization Debt relief vs. aid Donor commitment and transparency Respecting conditionality Flexibility to spend or save Preventing aid dependency Protecting revenues Composition Corruption Tax The treatment of aid scaling down of aid Private economic activity Real spending and recurrent spending Corruption and economic performance Impact on growth Likelihood of disbursement Anticorruption strategies Reduce state role Improve regulatory environment Punish offenders Liberalize and reform institutions Improving public expenditure management systems From aid fatigue to new initiatives Aid effectiveness is ambiguous Positive results likely with better policies and governance Five Primary Guidelines Minimize risks of Dutch disease Enhance growth Promote good governance and reduce corruption Prepare an exit strategy Assess the policy mix Isard, Lipschitz, Mourmouras, and Yontcheva, 2006, Macroeconomic Management of Foreign Aid: Opportunities and Pitfalls, IMF. Gupta, Powell, and Yang, 2006, Macroeconomic Challenges of Scaling up Aid to Africa: A Checklist for Practitioners, IMF. Rajan and Subramanian, 2005, “Aid and Growth: What Does the Cross-Country Evidence Really Show?”, IMF Working Paper. ______, 2005, “What Undermines Aid’s Impact on Growth?”, IMF Working Paper.