Macro performance, fiscal behavior, and water investments: Three essays on the effects of foreign aid in Bangladesh

This dissertation comprises three essays that inquire into the effects of foreign aid in Bangladesh. The first two essays quantify the effects of aid on several key macroeconomic and fiscal variables, while the third essay examines the incongruencies between the traditional sectoral approaches to planning aid financed water projects and the overall macroeconomic planning.;The first essay extends a traditional Harrod-Domar type growth model to account for the macroeconomic effects of natural calamities and political turmoil that evidently exact a heavy toll on the economy of Bangladesh. Econometric results obtained from a 2SLS model with 1973--1996 data show that aid has reduced both real GDP growth and gross domestic savings in Bangladesh. Furthermore, when total aid inflow is disaggregated into loans and grants, loans are found to stimulate economic growth, while grants are found to cause the contrary.;The second essay employs a Heller type non-linear 3SLS model to analyze the effects of aid on the government's fiscal behavior. It is found that while all tax revenues and bulk of loans are channeled into public investment, all grants are diverted to public consumption. Furthermore, loans are found to induce more judicious fiscal behavior vis-a-vis grants, e.g. increased tax collection, reduced domestic borrowings, increased socio-economic expenditures, and diminished non-productive civil expenditures. These results demonstrate that grants are mostly dissipated into financing non-productive civil expenditures, e.g. administrative and defense expenditures, etc., while loans are effectively utilized in undertaking physical investment projects, e.g. rural infrastructure, etc., and offering socio-economic provisions, e.g. education and healthcare, which augment human capital and eventually lead to higher output growth. These findings corroborate the results obtained from the first essay by delineating the mechanism whereby loans have contributed to GDP growth in Bangladesh, while grants have not.;The third essay illustrates the deficiencies of traditional planning approaches to aid financed water investments and demonstrates the importance of embedding the macroeconomic linkages of agricultural into planning framework. First, a dynamic cost minimization model is utilized to compute the minimum amount of investments needed in various water projects such that an exogenously set agricultural growth target can be met. Next, the minimum cost solution is again derived accounting for the macroeconomic linkages of agriculture in a joint agro-macro model. The differences in the optimal solutions obtained from the two models suggest that foreign aid is commonly allocated into financing water investments that are non-optimally planned.