Peter Isard, Leslie Lipschitz, Alexandros Mourmouras, Boriana Yontcheva (eds). The Macroeconomic Management of Foreign Aid--Opportunities and Pitfalls.

Javid, Muhammad

Peter Isard, Leslie Lipschitz, Alexandros Mourmouras, Boriana Yontcheva (eds). The Macroeconomic Management of Foreign Aid--Opportunities and Pitfalls. Washington, DC: International Monetary Fund. 2006. 277 pages. Paperback. US $28.

The ten articles in this book written by internationally well-known economists and presented in a seminar organised by the International Monetary Fund and other international financial institutions are concerned with the scaling up of foreign aid in order to achieve the Millennium Development Goals. These articles address the issues such as the relationship between aid, growth, and poverty reduction; effectiveness of foreign aid conditions for macroeconomic policies; the potential for large increases in aid to affect the competitiveness of the recipient country adversely; volatility and unpredictability of foreign aid; the impact of higher aid flows on the debt sustainability of recipients; and the effect of aid on institutions.

Steven Radelet's paper on "Aid and Growth" disaggregates aid into humanitarian assistance, early impact aid to finance infrastructure, and direct investment and other sectors, and late impact aid to finance investments in human capital and social capital. He concludes that early impact aid has a strong and robust impact on growth, but argues that aid is not fully fungible and different types of aid have different types of relation to growth. Aart Kraay's "Aid Growth and Poverty" focuses on the effectiveness of aid in the presence of macroeconomic policies and finds that only 4 percent variation is explained by aid. He also points out that growth is the predominant force behind poverty reduction, and governance problems are a significant constraint on both growth and poverty reduction.

David L. Bevan reviews the macroeconomic issues and concludes that there is no general case for believing that enhanced resources cannot be used effectively even if aid is large relative to the economy. High aid inflow in a case study of Ghana examines the macroeconomic policy response to scaling up aid inflow in 2001-03. The authors state that the aid inflows during this period were volatile and unpredictable, fluctuating by several percentage points of GDP. The findings of the study suggest that aid may be useful temporarily, and aid would appear to be the least attractive option especially when domestic sterilisation is used to avoid pressure on inflation and exchange rate appreciation.

Mark and Hans examine the issue of the effective absorption capacity of the economy as a result of higher resource flows. They analyse the Ethiopian case by distinguishing between direct aid and spending aid on social sectors to achieve the MDGs. Spending on infrastructure helps to achieve the objective of poverty reduction and spending on social services helps to achieve the other MDGs. The study considers the trade-off between infrastructure and social spending. The results also suggest that Dutch disease is a serious concern in the case of Ethiopia. The large scale of aid inflow, other than direct aid, is costly.

Christopher Adam's study is concerned with two objectives: first, the macroeconomic transmission from aid inflows to the real exchange rate and export performance; and, second, the determining of the macroeconomic response to increased aid flows. The central messages of this study is that when there is an initial lack of public infrastructure, aid impact is positive. The real exchange rate may overshoot due to the economy's response to aid inflow; aid inflow may shift the non-tradable goods supply significantly.

According to Bulir and Hamann's findings, aid is more volatile than domestic revenue. Daseking and Joshi analyse the debt sustainability problems of low-income countries and find that for many countries the debt sustainability problems worsened, even though the loans were highly concessional. In the final chapter, the authors analyse the relationships among aid, governance, and political economy. They conclude that policies may be insufficient to achieve growth when institutions are weak.