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Roads out of Poverty: Assessing the Links between Aid, Public Investment, Growth, and Poverty Reduction


Paper (957Kb)
Monday, April 26, 2004
12:30 - 2:00 PM
Speakers: Pierre-Richard Agénor (WBIPR and Yale University) and Karim El Aynaoui (AFTP2)

The paper discussed at this event presents an operational macro framework that captures the links between foreign aid, investment, growth and poverty. Foreign aid is decomposed into food and non-food assistance, whereas public investment is disaggregated into spending on education, infrastructure, and health. Both supply-side and demand-side effects of (quality-adjusted) public capital in infrastructure are accounted for. Public capital is subject to congestion effects. Potential Dutch disease effects associated with aid flows and constraints on absorptive capacity are also captured. The impact of policy shocks on poverty is assessed by linking the model to a household survey. The model is dynamic; this allows the analysis of dynamic trade-offs that poverty-reduction strategies may entail regarding the impact of policy reforms, e.g. between the short-run impact of higher public spending on education and health (on the budget and aggregate demand) and the long-run effects on the productivity and supply of educated labor.

The model is applied to Ethiopia. Various simulations related to the allocation of foreign aid and public investment are performed. The model is also used in normative mode, to assess by how much foreign aid should increase in order for Ethiopia to reach the MDG poverty targets.

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