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The Effects of Foreign Aid on the Creation and Distribution of Wealth

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  • Wenli Cheng

    (Department of Economics, Monash University)

  • Dingsheng Zhang

    (CEMA, Central University of Finance and Economics)

  • Heng-fu Zou

    (Guanghua School of Management, Peking University
    Institute for Advanced Study, Wuhan University)

Abstract

This paper develops a model to study the effects of foreign aid on the creation and distribution of wealth in the recipient country. It considers three types of foreign aid: permanent grants to all individuals, temporary grants to uneducated workers, and foreign aid in the form of low interest rate loans to individuals who invest in education. The model shows that the economy may have two long-run equilibria, a rich equilibrium and a poor one. All types of foreign aid can increase the proportion of individuals investing in education, which means more people converging to the rich equilibrium and higher average wealth in the economy. In addition, if permanent or temporary grants are sufficient large, it is possible that the whole economy may converge to the rich equilibrium.

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Bibliographic Info

Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 9 (2008)
Issue (Month): 2 (November)
Pages: 223-237

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Handle: RePEc:cuf:journl:y:2008:v:9:i:2:p:223-237

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Related research

Keywords: Foreign aid; Overlapping-generations model; Investment in education;

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References

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  1. Henrik Hansen & Finn Tarp, 2000. "Aid effectiveness disputed," Journal of International Development, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 12(3), pages 375-398.
  2. Gong, Liutang & Zou, Heng-fu, 2001. "Foreign Aid Reduces Labor Supply and Capital Accumulation," Review of Development Economics, Wiley Blackwell, Wiley Blackwell, vol. 5(1), pages 105-18, February.
  3. Galor, Oded & Moav, Omer, 1999. "From Physical to Human Capital Accumulation: Inequality in the Process of Development," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2307, C.E.P.R. Discussion Papers.
  4. Santanu Chatterjee & Stephen J. Turnovsky, 2005. "Financing Public Investment through Foreign Aid: Consequences for Economic Growth and Welfare," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 13(1), pages 20-44, 02.
  5. Djajic, Slobodan & Lahiri, Sajal & Raimondos-Moller, Pascalis, 1999. "Foreign Aid, Domestic Investment and Welfare," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 109(458), pages 698-707, October.
  6. Galor, Oded & Zeira, Joseph, 1988. "Income Distribution and Macroeconomics," MPRA Paper 51644, University Library of Munich, Germany, revised 01 Sep 1989.
  7. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, Elsevier, vol. 40(2), pages 289-329, February.
  8. Galor, Oded & Tsiddon, Daniel, 1997. " The Distribution of Human Capital and Economic Growth," Journal of Economic Growth, Springer, Springer, vol. 2(1), pages 93-124, March.
  9. Mosley, Paul & Hudson, John & Horrell, Sara, 1987. "Aid, the Public Sector and the Market in Less Developed Countries," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 97(387), pages 616-41, September.
  10. Liutang Gong & Heng-fu Zou, 1999. "Foreign Aid Reduces Domestic Capital Accumulation and Increases Foreign Borrowing: A Theoretical Analysis," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 8, China Economics and Management Academy, Central University of Finance and Economics, revised Apr 2000.
  11. Michael Benarroch & James D. Gaisford, 2004. "Foreign Aid, Innovation, and Technology Transfer in a North-South Model with Learning-by-Doing," Review of Development Economics, Wiley Blackwell, Wiley Blackwell, vol. 8(3), pages 361-378, 08.
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Cited by:
  1. Juan Felipe Riaño-Rodríguez, 2014. "More than Words and Good Intentions: The Political Agenda-Setting Power," DOCUMENTOS CEDE, UNIVERSIDAD DE LOS ANDES-CEDE 011011, UNIVERSIDAD DE LOS ANDES-CEDE.
  2. Heng-fu Zou, 2011. "Foreign Asset Accumulation and Macroeconomic Policies in a Model of Mercantilism," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 432, China Economics and Management Academy, Central University of Finance and Economics.

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