SHORT-PERIOD MACROECONOMIC ASPECTS OF FOREIGN-AID

By concentrating on the supply side, the existing literature on foreig n aid, e.g. the Two Gap or the Dutch Disease model, neglected the role that foreign aid might also play in influencing the level of domestic demand. This paper redresses the balance. It analyses the role of for eign aid in the short period by incorporating problems of both effecti ve demand and supply side constraints. The analysis shows how and why aid can be useful or wasteful, especially in the context of economic l iberalisation. This may, for example, imply that an increase in foreig n aid has to be combined with an appropriate expansionary domestic dem and policy in order to stimulate domestic employment and output. (C) 1 996 Academic Press Limited