Aid and the supply side: public investment, export performance and Dutch disease in low income countries

Contemporary policy debates on the macroeconomics of aid often concentrate on short run Dutch disease effects, ignoring the possible supply side impact of aid financed public expenditure. We present a simple model of aid and public expenditure in which public infrastructure generates an inter-temporal productivity spillover which may exhibit a sector-specific bias. The model also provides for a learning-by-doing externality, through which total factor productivity in the tradable sector is an increasing function of past export volumes. We then use an extended version of this model, calibrated... Mehr ...