## The Macroeconomics of Medium-Term Aid Scaling-Up Scenarios

_IMF Working Papers, July 1, 2010_

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## Bibliographic details
- Authors: Rafael A Portillo, Andrew Berg, Jan Gottschalk, Luis-Felipe Zanna
- Published: July 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455201433.001

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### Model structure and calibration
- The model analyzes the macroeconomic effects of a scaling-up of aid and the implications of different policy responses.
- Key structural characteristics included:
  - varying degrees of public investment efficiency
  - a learning-by-doing (LBD) externality that captures Dutch disease effects
- Policy distinctions:
  - "Spending the aid" — controlled by the fiscal authority
  - "Absorbing the aid" — financing a higher current account deficit, influenced by the central bank's reserve accumulation policies
- Calibration:
  - The model is calibrated to Uganda and several experiments are run.

### Experimental scenarios and mechanisms
- Full spending and full absorption of aid
  - Results in temporary demand pressures
  - Results in real exchange rate appreciation pressures
  - Generates positive effects on real GDP in the medium term through higher public capital
- Full spending with partial absorption
  - May stem appreciation pressures
  - May induce adverse medium-term real GDP effects via private sector crowding out
- Very inefficient public investment combined with strong LBD externalities
  - Aid can be harmful
  - Partial absorption policies may be justified
  - Alternative policy responses: defer spending or raise spending efficiency

### Main findings
- A policy mix that results in full spending and absorption of aid:
  - Can generate temporary demand and real exchange rate appreciation pressures
  - Can have a positive effect on real GDP in the medium term through higher public capital
- Full spending with partial absorption:
  - Can stem appreciation pressures
  - Can induce adverse medium-term real GDP effects through private sector crowding out
- When aid is very inefficiently invested and LBD externalities are strong:
  - Aid can be harmful
  - Partial absorption policies may be justified
  - Welfare-improving alternatives include deferring spending or raising its efficiency

### Policy implications and recommendations
- Where public investment is reasonably efficient and LBD externalities are not dominant:
  - Consider policies that allow both spending and absorption to realize medium-term GDP gains from higher public capital, while managing temporary demand and exchange rate pressures
- Where public investment is very inefficient or LBD externalities are strong:
  - Partial absorption policies may be warranted to avoid harm
  - Preferable policy responses include:
    - Deferring spending
    - Raising public investment efficiency if possible

*The Macroeconomics of Medium-Term Aid Scaling-Up Scenarios — Rafael A Portillo, Andrew Berg, Jan Gottschalk, Luis-Felipe Zanna; July 1, 2010.*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/the-macroeconomics-of-medium-term-aid-scaling-up-scenarios-24037_