Aid, Spending Strategies and Productivity Effects – A Multi-sectoral CGE Analysis for Zambia

Numerous econometric studies fail to detect a signicant and robust relationship between international aid and economic growth in the recipient countries. Dutch Disease effects might be responsible for this result.This paper examines the relation between aid and its effectiveness in a multi-sector multihousehold Computable General Equilibrium (CGE)-framework. Given that international transfers to African countries increasingly take the form of general financial support to the government, different spending strategies and their macroeconomic, sectoral and distributional effects are evaluated in a two-stage simulation making a distinction between immediate direct effects and possible long-run effects from increased productivity. While the model simulates the effects of additional aid in Zambia it can be used as a blueprint for other African countries.