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Foreign aid, domestic investment and welfare

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  • Slobodan Djajic, Sajal Lahiri and Pascalis Raimondos-Møller

Abstract

This paper examines the welfare implications of temporary foreign aid in a simple two-period, two-country model of trade. Domestic investment is endogenous, providing an important link between aid in period one and the terms of trade in periods one and two. Transfer-induced changes in the terms of trade redistribute present and future income between the donor and the recipient. In the presence of barriers to international borrowing and lending, such redistribution gives rise to the possibility of temporary aid being both potentially and strictly Pareto improving.

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Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 463.

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Handle: RePEc:esx:essedp:463

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References

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  1. Djajic, Slobodan & Lahiri, Sajal & Raimondos-Moller, Pascalis, 1999. "Foreign Aid, Domestic Investment and Welfare," Economic Journal, Royal Economic Society, vol. 109(458), pages 698-707, October.
  2. Galor, O. & Polemarchakis, H.M., 1984. "Intertemporal equilibrium and the transfor paradox," CORE Discussion Papers 1984014, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Polemarchakis, H M, 1983. "On the Transer Paradox," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(3), pages 749-60, October.
  4. Turunen-Red, Arja H. & Woodland, Alan D., 1988. "On the multilateral transfer problem : Existence of Pareto improving international transfers," Journal of International Economics, Elsevier, vol. 25(3-4), pages 249-269, November.
  5. Bhagwati, Jagdish N & Brecher, Richard A & Hatta, Tatsuo, 1983. "The Generalized Theory of Transfers and Welfare: Bilateral Transfers in a Multilateral World," American Economic Review, American Economic Association, vol. 73(4), pages 606-18, September.
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Cited by:
  1. Slobodan Djajic & Sajal Lahiri & Pascalis Raimondos-Møller, . "Logic of Aid in an Intertemporal Setting," EPRU Working Paper Series 96-21, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  2. Pierre-Richard Agenor, 2005. "The Macroeconomics Of Poverty Reduction," Manchester School, University of Manchester, vol. 73(4), pages 369-434, 07.
  3. Santanu Chatterjee & Georgios Sakoulis & Stephen Turnovsky, 2000. "Unilateral Capital Transfers, Public Investment, and Economic Growth," Discussion Papers in Economics at the University of Washington 0008, Department of Economics at the University of Washington.
  4. 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.
  5. Steven Brakman & Harry Garretsen & Charles van Marrewijk, 2006. "Agglomeration and Aid," CESifo Working Paper Series 1750, CESifo Group Munich.
  6. Stephen M. Miller & Kyriakos C. Neanidis, 2012. "Demographic Transition and Economic Welfare: The Role of Humanitarian Aid," Working papers 2012-06, University of Connecticut, Department of Economics.
  7. Djajic, Slobodan & Lahiri, Sajal & Raimondos-Moller, Pascalis, 1999. "Foreign Aid, Domestic Investment and Welfare," Economic Journal, Royal Economic Society, vol. 109(458), pages 698-707, October.
  8. Lahiri, Sajal & Raimondos-Moller, Pascalis & Wong, Kar-yiu & Woodland, Alan D., 2002. "Optimal foreign aid and tariffs," Journal of Development Economics, Elsevier, vol. 67(1), pages 79-99, February.
  9. Santanu Chatterjee & Stephen Turnovsky, 2002. "Substitutability of Capital, Investment Costs, and Foreign Aid," Working Papers UWEC-2002-08-P, University of Washington, Department of Economics, revised Nov 2002.
  10. Stephen J. Turnovsky & Santanu Chatterjee, 2004. "Tied Versus Untied Foreign Aid: Consequences for a Growing Economy," Computing in Economics and Finance 2004 8, Society for Computational Economics.
  11. Wenli Cheng & Dingsheng Zhang & Heng-Fu Zou, 2006. "THE EFFECTS OF FOREIGN AID ON THE CREATION AND DISTRIBUTION OF WEALTH Wenli Cheng, Dingsheng Zhang and Heng-Fu Zou," Development Research Unit Working Paper Series 10/06, Monash University, Department of Economics.
  12. Djajic, Slobodan, 2008. "Foreign Aid, Infrastructure Development, and Welfare: An Intertemporal Analysis," Working Paper Series RP2008/64, World Institute for Development Economic Research (UNU-WIDER).
  13. Emily T. Cremers, 2008. "Transfers, the Terms of Trade and Capital Accumulation," DEGIT Conference Papers c013_018, DEGIT, Dynamics, Economic Growth, and International Trade.

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