Christopher Adam

Aid, Taxation, And Development In Sub-Saharan Africa

External aid donors have gradually shifted from a benign view of the African state to one that presumes a conflict of interest between the state and its own private sector. What are the implications of this diagnosis for the design of aid programs? We develop a model that locates slow growth in the overly narrow interests of a political elite. We study the impact of aid on policy choice and private investment and the role of conditionality in securing the gains from aid. The results capture key features of the current diagnosis while underscoring the need for more sophisticated treatments of domestic political institutions, institutional change, and donor motivations. Copyright 1999 Blackwell Publishers Ltd..

Redesigning the Aid Contract: Donors' Use of Performance Indicators in Uganda

Abstract The perceived failure of traditional ( ex ante ) conditionality has led to proposals for using performance indicators as a basis for aid allocations ( ex post conditionality). In this article we assess the role of performance indicators and their impact on the aid contract between donors and the government of Uganda. In Uganda the use of performance indicators has radically changed donor–recipient relations, by improving both program monitoring and donor coordination. It has, however, not yet fundamentally changed the incentive structure in the aid “contract.” To improve the incentive structure we propose a distinction between indicators used for monitoring and those designed to guide aid allocations.

Exchange rate regimes and revenue performance in Sub-Saharan Africa

It has been argued that the institutions of the CFA Franc zone may have reduced inflation but that they also induced misalignment of the real exchange rate and that this is the explanation for their dismal revenue performance. This paper uses a panel of 22 countries in sub-Saharan Africa to estimate revenue performance over the period from 1980 to 1996. It finds that the poor cumulative relative revenue performance of the franc zone countries is mainly attributable to differences in environmental and structural factors, and that different responses to changes in the equilibrium real exchange rate, but that the misalignment of the real exchange rate also played a part.

Exchange rate regimes and trade

A ‘new version’ gravity model, is used to estimate the effect of a full range of de facto exchange rate regimes, as classified by Reinhart and Rogoff (2004), on bilateral trade. The results indicate that, while participation in a common currency union is typically strongly ‘pro-trade’– as first suggested by Rose (2000) – other exchange rate regimes which lower the exchange rate uncertainty and transactions costs associated with international trade between countries are significantly more pro-trade than the default regime of a ‘double float’. They suggest that the direct and indirect effects of exchange rate regimes on uncertainty and transactions costs tend to outweigh the trade-diverting substitution effects. In addition, there is evidence that membership of different currency unions by two countries has pro-trade effects, which can be understood in terms of a large indirect effect on transactions costs. Tariff-equivalent monetary barriers associated with each of the exchange rate regimes are also calculated

Fiscal adjustment, financial liberalization, and the dynamics of inflation: Some evidence from Zambia

The liberalization of foreign exchange and domestic asset markets imposes fiscal costs on governments which are net purchasers of foreign currency from the private sector and net borrowers from the financial system. Fiscal costs increase if liberalization also induces the private sector to reduce domestic money balances in favor of foreign currency and domestic interest-bearing assets. The substitution out of domestic money reduces seigniorage revenue accruing to government and, unless offsetting fiscal adjustment can be made, will often lead to accelerating inflation. This paper presents a model of inflation and financial liberalization applied to recent stabilization experiences in Zambia to illustrate the fiscal and inflationary consequences of financial liberalization implemented prior to the achievement of fiscal balance.

Staying the Course: Maintaining Fiscal Control in Developing Countries ∗

We use panel data on 83 developing and 25 OECD countries for the period from 1970-2000 to examine variations in the persistence of episodes of fiscal stability. Persistence is defined as the length of time the cyclically adjusted conventional fiscal balance exceeds a specific threshold, where the latter is based on plausible target values for the steadystate public debt-to-GDP ratio. We estimate hazard functions based on a range of alternative deficit thresholds. Four principal results emerge: (i) the fiscal stance and the determinants of fiscal stability differ significantly between OECD and developing countries and between middleincome and low-income countries; (ii) apart from the level of income, conventional structural characteristics of economies play a relatively minor role in explaining the persistence of fiscal stability; (iii) a history of poor fiscal management has a deleterious effect on efforts to maintain a sustainable fiscal stance. For middle-income and OECD countries, but not low-income countries, this legacy depreciates rapidly; (iv) in contrast to comparable work on the OECD we find that revenue reforms rather than expenditure cuts play the major role in underpinning fiscal stability, particularly for low-income countries.

The transactions demand for money in the presence of currency substitution: evidence from Vietnam

Currency substitution – the use of foreign money to finance transactions between domestic residents – is widespread in low income and transition economies. Traditionally, however, empirical models of the demand for money tend to concentrate on the portfolio motive for holding foreign currency, while maintaining the assumption that the income elasticity of demand for domestic money is invariant to the degree of currency substitution. A simple re-specification of the demand for money is offered which more accurately reflects the process of currency substitution by allowing for a variable income elasticity of demand for domestic money. This specification is estimated for Vietnam in the 1990s. Using a standard cointegration framework evidence is found for currency substitution only in the long-run but well-defined wealth effects operating in the short-run.

Liberalisation and Seigniorage revenue in Kenya, Ghana and Tanzania

This article examines the implications for seigniorage revenue of exchange rate and asset market liberalisation. It is argued that liberalisation lowers the average and marginal seigniorage capacity of governments by increasing the elasticity of substitution between base money and other financial assets. Moreover, to the extent that exchange rate liberalisation eliminates goods market rationing, it simultaneously reduces the return to holding precautionary and speculative money balances. The implication is that countries that have relied on seigniorage revenue need to undertake deeper‐than‐anticipated fiscal adjustment in order to maintain macroeconomic balance following liberalisation programmes. The article uses error‐correction estimates of the demand for base money to derive the long‐run revenue maximising rate of inflation for the three economies and to assess the revenue implications of the sluggish adjustment of money demand in response to short‐term monetary shocks.

Aid volatility, monetary policy rules and the capital account in African economies *

We examine the properties of simple quantity-based monetary policy rules of the kind widely used in low-income African economies. Using a DSGE model and focusing our attention on responses to positive aid shocks, we suggest that policy rules involving substantial reserve accumulation in the face of aid surges serve to ease macroeconomic adjustment to shocks, particularly when a portion of aid is used to support fiscal adjustment. These rules are robust to assumptions about the degree of integration of the domestic public debt market with world capital markets. Although an open capital account facilitates smoother adjustment to temporary aid surges when an aid inflow is fully spent, it exacerbates the adjustment problem when aid is accompanied by fiscal adjustment and hence reinforces the case for a managed float in such circumstances.

Monetary Policy and Oil Price Surges in Nigeria

The management of oil revenues is the past, present and future of macroeconomic policy in Nigeria. As Paul Collier describes (Chapter 2), the long history of fiscal mismanagement of oil booms in Nigeria saw the Central Bank of Nigeria’s ability to pursue a coherent monetary policy severely circumscribed. Without the sup-port of a disciplined and broadly predictable fiscal stance, the Central Bank was unable to make credible commitments to an inflation target or, indeed, to any other intermediate target such as the money supply or the exchange rate. Monetary policy could not reliably anchor inflation expectations. Since the turn of the century, however, the landscape has started to change. Harnessed to a stronger political commitment, the successful consolidation in the financial sector concluded at the end of 2005 and the de facto unification of the foreign exchange markets in early 2006, measures such as the Fiscal Responsibility Bill, currently working its way through the legislature, are laying the foundations for improved fiscal management of oil revenues. As a result, and for possibly the first time in its history, the prospects now exist for genuinely ‘independent’ Central Banking in Nigeria. It now makes sense to consider monetary policy playing a more central role in short-rim macrneconomic management in Nigeria.