Edited by Gill Hammond, Ravi Kanbur and Eswar Prasad
Chapter 6: Aid Reversals, Credibility and Macroeconomic Policy
6. Aid reversals, credibility and macroeconomic policy Edward Buffie, Christopher Adam, Stephen O’Connell and Catherine Pattillo* 6.1 INTRODUCTION To absorb and spend the aid would appear to be the appropriate response under ‘normal’ circumstances. (Berg et al., 2007, p. 19) Surprisingly, a full absorb-and-spend response is not observed in any of the sample countries. (Berg et al., 2007, p. 36) In all countries, part of the aid increment was lost through reductions in the rate of capital inflow. In Ghana, the deterioration in the non-aid capital account exceeded the entire increment in the aid inflow. In Tanzania and Uganda, the reduction in the rate of non-aid capital inflows was comparable to the aid surge. (Berg et al., 2007, p. 28) The G8 countries have pledged to increase aid dramatically to sub-Saharan Africa (SSA) in an effort to meet the Millennium Development Goals. It is not clear, however, that a big aid push is realistic. Seven country studies recently completed at the International Monetary Fund (IMF) (Berg et al., 2007) and the Overseas Development Institute (ODI) (Foster and Killick, 2006) found that the current account deficit usually increases by less than half of the rise in aid flows and that aid surges often coincide with large capital outflows. These are disconcerting correlations. If the current account deficit does not increase by the same amount as aid, the transfer of real resources is incomplete. A substantial part of aid ends up financing capital flight or reserve accumulation instead of worthy projects. The...
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