Stephen A. O'Connell

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..

Aid Intensity In Africa

The countries of Sub-Saharan Africa are disproportionately among those receiving the most foreign aid per capita in the world. In this paper we assess the intensity of aid flows to African countries, defined as the size of these flows relative to the categories of economic activity they are designed to support. In the process we provide a critical overview of standard measures of aid and place the flows currently being received by African countries in a cross-country and intertemporal perspective. We draw examples throughout from Botswana, Burkina Faso, Cameroon, Mali, Mozambique, Uganda and Zambia—seven countries whose aid experience spans that of Sub-Saharan Africa and will subsequently be the subject of intensive study.1 Measured relative to recipient GNP, the median value of aid to African countries now stands at nearly 10 times the amount received by Western Europe under the Marshall Plan. While a presumption in favor of fundamental effects on welfare and institutions seems uncontestible, the term “aid intensity” is deliberately neutral. For most of the paper we steer clear of concepts like “aid effectiveness” and “aid dependence” that presuppose a behavioral analysis of the aid relationship. While intensity and effectiveness may be closely related under particular circumstances, the two are clearly distinct. Burnside and Dollar (1996)), for example, find that when countries of disparate institutional and policy environments are pooled together, there is no systematic relationship between the intensity of aid and its effectiveness in raising the recipient’s economic growth rate. Aid dependence is a murkier concept that is often directly conflated with aid intensity, as by the World Bank in its annual World Development Indicators.2 But this ignores the essentially intertemporal nature of dependency while implicitly locating dependency in the recipient rather than the donor. The disparate experiences of countries like Botswana and Uganda bring out a clear distinction between the level and evolution of aid intensity and suggest that case-specific features may overwhelm any mechanical link between the two. We return to these issues at the end of the paper. The Development Assistance Committee (DAC) of the OECD is the main source of comprehensive and internationally comparable data on aid flows. The DAC’s concept of “official development assistance” (ODA) is widely used in international comparisons, and we begin in section 1 with an overview of recent trends in ODA. Section 2 places the ODA measure in a macroeconomic accounting context and discusses its strengths and weaknesses as a measure of aid receipts. With caveats in place, we move on in section 3 to study the resource intensity of aid and its evolution over time. Measuring aid aggregates relative to GNP, population, imports, investment, and government spending, we compare regional medians and rank the case study countries relative to the full sample. Five of the seven case study countries, and by some measures the African median, fall into the upper quartile of aid intensity in the 1990s, a category we identify as “highly aid intensive.” We then observe that a country’s aid ratios can be high in an absolute sense but low relative to what would have been expected given the country’s structural characteristics. We present adjusted rankings that control for population and real income per capita, and speculate about what can be learned from the differences between these and the raw rankings. In section 4 we make a distinction between the resource intensity of aid flows and their transactions intensity. This distinction is central to the HIPC Initiative and further heightens the presumption of high aid intensity in Africa. Section 5 concludes the paper with a summary of our main findings.

Contrasting Monetary Regimes in Africa

In post-independence sub-Saharan Africa, institutional arrangements for monetary policy have taken a variety of forms, although the historical evolution of many African financial systems has been similar. This paper identifies five different regimes and examines how they evolved over time. It focuses on how the alternative institutional arrangements have influenced the performance of monetary policy under fiscal pressure, and concludes that, although the trend appears to be toward more flexible regimes, the transition to greater flexibility can exacerbate problems of credibility and of macroeconomic management.

A Sovereign Debt Model with Trade Credit and Reserves

This paper analyzes sovereign debt in an economy in which the availability of short-term trade credit reduces international trade transaction costs. The model highlights the distinction between gross and net international reserve positions. Borrowed reserves provide net wealth and liquidity services during a negotiation, as long as they are not fully attachable by creditors. Moreover, reserves strengthen the bargaining position of a country by shielding it from a cut-off from short-term trade credits thereby diminishing its degree of impatience to conclude a negotiation. We show that competitive banks do lend for the accumulation of borrowed reserves, which provide partial insurance.

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.

The Macroeconomics of Delayed Exchange-Rate Unification: Theory and Evidence from Tanzania

Parallel exchange-rate markets have often been dismissed by authorities as a nuisance or as the domain of a small group of economic saboteurs. Using Tanzania as a case study, the authors argue instead that these markets played a central macroeconomic role in the 1970s and 1980s. They provide a rigorous macroeconomic analysis of the parallel foreign-exchange market and its fiscal implications. First, they investigate the evolution of that market in Tanzania from the mid-1960s to 1990. That period stretched from the adoption of exchange controls to macroeconomic collapse and then to subsequent reforms in the mid- to late 1980s. A reduced -form econometric equation (of a Dornbusch stock-flow model type) indicates that both trade and financial portfolio factors were important in determining the parallel premium, with trade determinants the parallel premium, with trade determinants dominating in the long run, as theory suggests. Then they investigate the fiscal impact of the parallel exchange-rate premium, an issue emphasized in the literature on exchange-rate unification. They construct a counterfactual simulation of fiscal and balance-of-payments flows under alternative assumptions about the indexing of those flows to the parallel and official exchange rate. They find that a more aggressive move toward exchange-rate unification would have already delivered a fiscal bonus by the mid-1980s. Accordingly, unification of the exchange rate would have reduced monetary growth and inflationary pressures. So, contrary to conventional advice often given in Africa and elsewhere, the case of Tanzania suggests that from a fiscal viewpoint there was no economic rationale for gradualism in exchange-rate unification and delay of a move toward convertibility.

VAR meets DSGE; Uncovering the Monetary Transmission Mechanism in Low-Income Countries

VAR methods suggest that the monetary transmission mechanism may be weak and unreliable in low-income countries (LICs). But are structural VARs identified via short-run restrictions capable of detecting a transmission mechanism when one exists, under research conditions typical of these countries? Using small DSGEs as data-generating processes, we assess the impact on VAR-based inference of short data samples, measurement error, high-frequency supply shocks, and other features of the LIC environment. The impact of these features on finite-sample bias appears to be relatively modest when identification is valid—a strong caveat, especially in LICs. However, many of these features undermine the precision of estimated impulse responses to monetary policy shocks, and cumulatively they suggest that “insignificant†results can be expected even when the underlying transmission mechanism is strong.