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Immiserizing Foreign Aid

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  • Stephen Tokarick
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    Abstract

    International trade theory has pointed out that factor accumulation could immiserize a country if it is sufficiently biased toward the export sector, or if it is biased toward an importcompeting sector in the presence of tariff protection. This paper analyzes the impact of aid, in the form of an increase in the capital stock used only in the nontraded sector, on real income. Yano and Nugent (1999) discussed this issue, but their analysis turned out to be incorrect. This paper demonstrates that whether aid in the form of an increase in capital specific to the nontraded sector reduces welfare depends on how aid affects the price of the nontraded good and on whether imports and the nontraded good are substitutes or complements in demand.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/129.

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    Length: 17
    Date of creation: 01 May 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/129

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    Related research

    Keywords: Economic models; equation; international trade; imported good; factor endowments; trade theory; world prices; factor accumulation; equations; import-competing sector; trade effects; tariff revenue; trade model; domestic price; domestic consumption; export sector; general equilibrium models; domestic demand; tariff rate; political economy; trade models; commodity prices; import sector; price of imports; domestic prices; open economy; terms of trade; tariff protection; world trade; income losses; elasticity of substitution; domestic price of imports;

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    1. 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.
    2. Ronald W. Jones, 1965. "The Structure of Simple General Equilibrium Models," Journal of Political Economy, University of Chicago Press, vol. 73, pages 557.
    3. Jeffrey B. Nugent & Makoto Yano, 1999. "Aid, Nontraded Goods, and the Transfer Paradox in Small Countries," American Economic Review, American Economic Association, vol. 89(3), pages 431-449, June.
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