Abstracts and links to full papers

Why Not “Front-load” ODA for HIV/Aids?
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Abstract: With the increases in global funds dedicated to combating the HIV/Aids epidemic, ODA should be ‘front-loaded’ to recipient countries instead of being disbursed gradually. Governments and donors behave cautiously regarding ODA disbursement because they fear the ‘Dutch disease’ effect, in which ODA domestic spending makes a country’s exports less competitive on international markets. However, the evidence for this effect is weak. This paper makes the case that funding for HIV/Aids should be disbursed as soon as it becomes available in order to halt the spread of the pandemic and to safeguard human capabilities essential for productivity. Furthermore, front-loaded ODA disbursement would increase the long-term effectiveness of government spending by building up infrastructure, institutions, and human resources.

The Macroeconomic Debate on Scaling up HIV/AIDS Financing
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Abstract: This paper highlights the lack of evidence to support the fear that ODA scale up may precipitate macroeconomic instability, and argues that any potential harmful effects could be minimized by coordination of economic policies. The standard argument is that a large inflow of foreign exchange would unfavorably appreciate a country’s exchange rates. This so-called ‘Dutch Disease’ has not proven a reality based on recent examples from seven African countries, in which real exchange rates tended to depreciate as their foreign aid has increased dramatically. This likely occurs as a result of the substantial portion of government spending from ODA that funds the importation of in-kind transfers such as antiretroviral medicines and other medical supplies that have no monetary impact. Still, the healthcare worker shortage and demand for higher salaries for medical personnel are possible sources of inflationary pressure. Coordinating monetary and exchange rate policies with expansionary fiscal policies could minimize any potential macroeconomic instability caused by an influx of ODA.

Monetary Policies for an MDG-Related Scaling up of ODA to Combat HIV/AIDS
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Abstract: This Conference Paper discusses the best monetary policy to manage the macroeconomic effects of an MDG-related scaling up of aid inflows to address the HIV/AIDS pandemic. Many economists have expressed concern that a substantial scaling up of aid inflows would lead to greater inflation and real exchange rate overvaluation. Thus, in such a context, they often advocate that central banks adopt restrictive monetary policies. However, such policies often make overvaluation worse by driving up the interest rate and reducing domestic liquidity. This paper suggests that the evidence on the overvaluation effects of aid inflows is thin, at best. Instead of advocating restrictive policies, this paper maintains that monetary policies should maintain low rates of interest, increase overall liquidity in the economy and maintain a relatively depreciated currency. Such policies will help support the expansion of fiscal space that will be necessary for reaching the MDG target of halting and reversing the HIV/AIDS pandemic. A substantial increase in ODA directed towards combating HIV/AIDS will lead to an expansion of government spending on domestic goods and services. But the impact of such spending will not necessarily be inflationary in economies, such as those of many low-income countries, which have significant excess capacity, i.e., underemployed labor and other productive factors.

Fiscal Implications of Scaling up ODA to Deal with the HIV/AIDS Pandemic
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Abstract: The HIV/AIDS pandemic has motivated large increases in aid commitments and disbursements, with promises of further large increases in the near future. This aid is urgently required to address the emerging humanitarian crisis and implies immediate, large-scale increases in public expenditure. The central question that this paper examines is whether such increases can effectively address the epidemic without inducing macroeconomic disturbances, especially for those countries, particularly in sub-Saharan Africa, where there is already high aid dependence and parallel commitments to the other MDGs. For the aid to lead to a real resource transfer, the monetary authorities in the recipient countries must accommodate such inflows. However, the twin dangers of ‘Dutch disease’ effects and inflation provide motivation for resisting accommodation. This paper argues that although such dangers are real, they are overemphasized: aid directed at HIV/AIDS is likely to have positive short- and long-term effects on production possibilities in the recipient countries and to be complementary to efforts to achieve the other MDGs. Furthermore, the increased fiscal deficit is a necessary condition for the appropriate resource transfer and is not likely, in itself, to have an inflationary impact. The danger of inflation lies in an effort by the monetary authorities to resist absorption. Recipient governments are understandably fearful of fiscal sustainability and debt sustainability because of the historical record of very high aid volatility and low predictability. However, spending that reduces the debilitating effects of HIV/AIDS is most likely to counteract such effects by raising government revenues in both the short and medium term. Nevertheless, donors have a responsibility to match disbursements to commitments on a more systematic and long-term basis, and reduce the dangers of volatility and unpredictability by shifting aid towards debt relief and grants. The possibility that aid-induced spending will quickly induce decreasing returns is an overly static and pessimistic view: aid targeted at HIV/AIDS can respond very elastically in the medium term and release the supply constraints that limit its effectiveness. Finally, many of the major impediments to aid effectiveness lie in donors’ behavior, particularly their lack of co-ordination with one another and with the recipient country. In summary, although there are potential dangers in scaling up aid-supported spending to address the HIV/AIDS pandemic, they are manageable and provide no reason for delaying the immediate application of resources on a large scale.