ABSTRACT
This chapter covers price effects. Unintended price effects occur when an external intervention distorts prices in recipient or adjacent villages, communities, cities, or regions, or affects the exchange rates of local currencies. This chapter covers three kinds of price effects: downward price effects, upward price effects, and the Dutch disease. Downward price effects occur when an influx of externally provided and subsidized in-kind aid suppresses prices, undermining local producers and ultimately reducing local production capacities. Upward price effects occur when an inflow of aid workers or externally provided cash aid contributes to (localized) inflation, pushing up the cost of living, especially for non-beneficiaries. The Dutch disease occurs when aid inflows drive up the value of the local currency, rendering exports from the recipient country less competitive and reducing the long-term economic capacity of the recipient country to grow and develop economically.
