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

Author

Listed:
  • 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.

Suggested Citation

  • Wenli Cheng & Dingsheng Zhang & Heng-fu Zou, 2008. "The Effects of Foreign Aid on the Creation and Distribution of Wealth," Annals of Economics and Finance, Society for AEF, vol. 9(2), pages 223-237, November.
    • Handle: RePEc:cuf:journl:y:2008:v:9:i:2:p:223-237
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    References listed on IDEAS

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    Cited by:

    1. Heng-fu Zou, 2011. "Foreign Asset Accumulation and Macroeconomic Policies in a Model of Mercantilism," CEMA Working Papers 432, China Economics and Management Academy, Central University of Finance and Economics.
    2. Juan Felipe Riano-Rodríguez, 2014. "More than Words and Good Intentions: The Political Agenda-Setting Power," Documentos CEDE 11011, Universidad de los Andes, Facultad de Economía, CEDE.

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    More about this item

    Keywords

    Foreign aid; Overlapping-generations model; Investment in education;
    All these keywords.

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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