SCALING UP ODA FOR HIV/AIDS PROGRAMS IN DEVELOPING COUNTRIES:

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SCALING UP ODA FOR HIV/AIDS
PROGRAMSIN DEVELOPING COUNTRIES

• EXCHANGE RATE MANAGEMENT ISSUES
• John Serieux
• University of Manitoba

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HIV/AIDS THE HUMAN DEVELOPMENT COST

• The Human Development Implication threaten all
  other aspects of development including MDG
  achievements and growth
• HIV/AIDS tends to entrench existing poverty and
  generate additional poverty
• Vulnerability/treatment costs/loss income

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HIV/AIDS THE AID IMPERATIVE

• A challenge to decreasing child mortality

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HIV/AIDS THE AID IMPERATIVE

• Direct loss of productive Capacity
• Loss of labor and human capital

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HIV/AIDS THE HUMAN DEVELOPMENT COSTS

• Challenge to growth
• Lower productivity
• Loss of human capital, morbidity, turnover etc.
• Reduced savings
• Reduced foreign and domestic investment

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HIV/AIDS THE HUMAN DEVELOPMENT COSTS

• The simultaneous challenges to human development
  and growth threaten to create a negative feedback
  mechanism

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ODA AND HIV/AIDS THE FEARS

• DUTCH DISEASE
• UNSUSTAINABLE DEBT BURDENS
• AID DEPENDENCY
• AID VOLATILITY

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THE DUTCH DISEASE STORY

• An aid-induced real exchange rate appreciation
  causes the demise of the export sector in the
  recipient country
• Exceptions
• Underutilized capacity the exchange rate effect
  is contradicted by a strong short-run supply
  response
• Productivity effects - the effect is undermined
  by a strong long-run supply response

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ODA AND HIV/AIDS - FEARS DUTCH DISEASE

• Empirical Evidence of Dutch Disease?
• If it occurs it occurs at high levels of aid
• Evidence of slower growth in export sectors
  (relative to the non-export sectors) is not
  necessarily an indication of Dutch disease
  because it is consistent with the case of
  underutilized capacity

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ODA AND HIV/AIDS - FEARS AID VOLATILITY

• Types of Volatility
• Disbursements not equal to Commitments
• Volatility in both commitments and disbursements
• Pro-Cyclical aid receipts
• Summary of the evidence
• The information content of disbursements is
  consistently poor
• Yet programming is based on commitments
• Aid is more volatile than revenues
• Most investigators find aid to be pro-cyclical

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ODA AND HIV/AIDS - THE POLICY ENVIRONMENT

• PRGF/PRSP related conditionalities result in
  certain preferences/biases in terms of
  macroeconomic policy
• Single-digit inflation levels
• A distaste for large current account deficits
• A bias towards reserve accumulation (in money
  supply management)
• A distaste for large fiscal deficits
• The effect appears to be a preventive rather
  than corrective macroeconomic management
  approach

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ODA AND HIV/AIDS - AN ORGANIZING FRAMEWORK

• Complete and optimal use of ODA flows would
  require
• Macro-absorption
• Requires and expansion of the current account
  deficit increased imports
• Real exchange rate appreciation (or reduced rate
  of depreciation) may be necessary
• Spending
• Implementation of initiatives that go through the
  government budget
• Requires an expanded budget deficit
• Micro-absorption
• Direction of aid to its intended target
• Achieving high rates of return per aid dollar

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ODA HIV/AIDS - Two Macroeconomic Approaches

• The Growth-First Approach
• Maintain the optimal macroeconomic environment
  for growth
• Protect the exchange rate and the inflation rate
• Maintain low to moderate fiscal and current
  account deficits
• The result is likely to be slow and careful
  build-up of aid
• The Human Development-First Approach
• Ensure that aid resources are used to the maximum
  of existing capacity
• Ensure that aid reaches its target and has the
  most immediate and powerful effect on HD measures
• Use macroeconomic policy to dampen volatility and
  moderate extreme price movements
• Rapid build-up and then sustain aid at required
  long-term levels (or at levels dictated by
  micro-absorptive capacity)

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Why a Human Development First Approach?

• The evidence suggests that, historically,
  countries have found it much easier to move from
  poor growth but good human development results to
  good growth and with human development than vice
  versa
• In short, the best way to protect the human
  development-growth cycle is to intervene from the
  human development angle
• That requires orienting policy towards optimizing
  micro-absorption outcomes

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A HUMAND DEVELOPMENT-FIRST APPROACH

• Aid levels should be dictated by micro-absorptive
  needs
• Macro-absorption and spending should allow for
  the requisite fiscal and current account deficits
• Long-term macroeconomic stability (as well as
  micro-absorptive efficiency) requires
• Building up a necessary reserve buffer to allow
  for predictable and sustainable spending flows in
  the face of exchange rate volatility

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A HUMAND DEVELOPMENT-FIRST APPROACH

• Exchange Rates and Macro-absorption
• In an HD-first approach, the only justification
  for less than full macro-absorption would be the
  need to create a reserve buffer
• But that will be necessary only during the
  initial scale-up period
• Full macro-absorption will require a real
  exchange rate appreciation (or reduced
  depreciation) initially, but it will be moderated
  by
• increased demand for imports
• A short-term supply response (use of
  underutilized capacity)
• Long-run supply response (productivity increase)
• Reduced macro-absorption should only be
  contemplated if the appreciation is large and
  sustained
• Perhaps an indication that bottlenecks are
  inhibiting supply responses

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ODA AND HIV/AIDS - POLICY RECOMMENDATIONS

• Exchange Rates and Spending?
• Less than full spending of aid is justified only
  by the development of the reserve buffer
• In this case spending shortfalls should exactly
  match reserve accumulation to avoid the creation
  of domestic macroeconomic imbalances no
  exchange rate effect
• Less than full spending may delay HD effects and
  likely compromises the micro-absorption
• Spending contraction can be contemplated if there
  is strong evidence of persistent micro-absorption
  failings (signaled by high and persistent
  inflation and real exchange rates)

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ODA AND HIV/AIDS - POLICY RECOMMENDATIONS

• What about Inflation?
• An increase in inflation is likely to be part of
  the economic response to an increase in aid
  signaling changes in relative prices and what is,
  essentially, a positive exogenous shock
• This will be particularly true in the case of
  fixed exchange rates
• Like the exchange rate, only high and sustained
  inflation should justify policy intervention
  (since both are transitory)
• High domestic interest rates are the likely
  consequence of trying to maintain low inflation
  targets it is not a benign effect and a case
  has not been made that it justifies avoiding
  transitory inflation
• A high interest rate may also encourage
  additional private inflows when the capital
  account is open (the case of Uganda)