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On the Growth Implications of Foreign Aid for Public Investment Co-Financing

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Author Info
Pantelis Kalaitzidakis
Sarantis Kalyvitis

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Abstract

In this paper we present an endogenous growth model with foreign transfers for public capital formation in order to analyze the implications for growth maximization when the public sector in recipient countries co-finances investment projects. Our main innovation is to show that, first, there is a unique growth-maximizing absorption rate of funds that decreases with the co-financing ratio and, second, that high amounts of assistance may be an impediment to growth due to the excess domestic taxation required to co-finance investment projects. We then derive a policy rule for designing the growth-maximizing co-financing share under a given level of assistance. Finally, we also highlight some implications for EU regional policies, which aim at fostering growth in poorer EU countries by co-financing public capital formation. Copyright © 2007 The Authors.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9361.2007.00385.x
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Publisher Info
Article provided by Blackwell Publishing in its journal Review of Development Economics.

Volume (Year): 12 (2008)
Issue (Month): 2 (05)
Pages: 354-371
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Handle: RePEc:bla:rdevec:v:12:y:2008:i:2:p:354-371

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  1. Kyriakos C. Neanidis & Dimitrios Varvarigos, 2007. "The Allocation of volatile aid and economic growth: Evidence and a suggestive theory," Discussion Paper Series 2007_07, Department of Economics, Loughborough University, revised Mar 2007. [Downloadable!]
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This page was last updated on 2009-11-22.

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