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Foreign Aid Policy and Sources of Poverty

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  • Alex Mourmouras
  • Peter Rangazas

Abstract

The econometric literature has been unable to establish a robust association between foreign aid and growth and poverty reduction. In this paper we argue that aid effectiveness must be assessed using methods that go beyond cross-country regressions. We calibrate a dynamic general equilibrium model that is capable of generating large income gaps between rich and poor countries. The model quantifies three sources of poverty: (i) lack of access to international capital, (ii) low schooling and high fertility (a poverty trap), and (iii) antigrowth domestic fiscal policy. We analyze policies designed to address each source of poverty and estimate and compare the aid cost of implementing the different policies. The policies differ dramatically in the extent and timing of their growth effects, and in the aid cost of their implementation.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/14.

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Length: 32
Date of creation: 01 Jan 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/14

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Related research

Keywords: Poverty; Capital flows; Economic growth; Economic models; fiscal policy; private capital; capital intensity; capital formation; international capital flows; international capital; tax base; fiscal reforms; capital inflows; capital accumulation; capital mobility; tax rates; capital market; budget constraint; government budget; fiscal reform; capital markets; capital stock; government budget constraint; access to international capital; government expenditures; tax revenue; private capital flows; capital market equilibrium; international capital markets; capital income; fiscal variables; government revenue; budget support; public expenditure; external capital; tax revenues; fiscal policies; capital spending; world capital market; government spending; tax policy; tax structure;

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References

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  1. Christopher S. Adam & David L. Bevan, 2006. "Aid and the Supply Side: Public Investment, Export Performance, and Dutch Disease in Low-Income Countries," World Bank Economic Review, World Bank Group, World Bank Group, vol. 20(2), pages 261-290.
  2. Raghuram G. Rajan & Arvind Subramanian, 2005. "What Undermines Aid's Impact on Growth?," NBER Working Papers 11657, National Bureau of Economic Research, Inc.
  3. Gordon, Roger & Li, Wei, 2009. "Tax structures in developing countries: Many puzzles and a possible explanation," Journal of Public Economics, Elsevier, Elsevier, vol. 93(7-8), pages 855-866, August.
  4. Arellano, Cristina & Bulír, Ales & Lane, Timothy & Lipschitz, Leslie, 2009. "The dynamic implications of foreign aid and its variability," Journal of Development Economics, Elsevier, Elsevier, vol. 88(1), pages 87-102, January.
  5. Michael Clemens & Steven Radelet & Rikhil Bhavnani, 2004. "Counting Chickens When They Hatch: The Short-term Effect of Aid on Growth," Working Papers, Center for Global Development 44, Center for Global Development.
  6. Stephen L. Parente & Edward C. Prescott, 2002. "Barriers to Riches," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262661306, December.
  7. Pritchett, Lant, 2000. " The Tyranny of Concepts: CUDIE (Cumulated, Depreciated, Investment Effort) Is Not Capital," Journal of Economic Growth, Springer, Springer, vol. 5(4), pages 361-84, December.
  8. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc.
  9. Santanu Chatterjee & Georgios Sakoulis & Stephen Turnovsky, 2000. "Unilateral Capital Transfers, Public Investment, and Economic Growth," Discussion Papers in Economics at the University of Washington, Department of Economics at the University of Washington 0008, Department of Economics at the University of Washington.
  10. Azariadis, Costas & Stachurski, John, 2005. "Poverty Traps," Handbook of Economic Growth, Elsevier, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 5 Elsevier.
  11. King, R.G. & Rebelo, S.T., 1989. "Transitional Dynamics And Economic Growth In The Neoclassical Model," RCER Working Papers 206, University of Rochester - Center for Economic Research (RCER).
  12. Moav, Omer, 2001. "Cheap Children and the Persistence of Poverty," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3059, C.E.P.R. Discussion Papers.
  13. Moshe Hazan & Binyamin Berdugo, 2005. "Child Labor, Fertility and Economic Growth," Development and Comp Systems 0507002, EconWPA.
  14. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 23(2), pages 177-200, March.
  15. Richard H. Clarida, 1993. "International Capital Mobility, Public Investment and Economic Growth," NBER Working Papers 4506, National Bureau of Economic Research, Inc.
  16. Agénor, Pierre-Richard & Bayraktar, Nihal & El Aynaoui, Karim, 2008. "Roads out of poverty? Assessing the links between aid, public investment, growth, and poverty reduction," Journal of Development Economics, Elsevier, Elsevier, vol. 86(2), pages 277-295, June.
  17. Jeremy Greenwood & Ananth Seshadri, 2004. "Technological Progress and Economic Transformation," NBER Working Papers 10765, National Bureau of Economic Research, Inc.
  18. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, American Economic Association, vol. 89(3), pages 379-399, June.
  19. Glomm, Gerhard & Ravikumar, B., 1997. "Productive government expenditures and long-run growth," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 21(1), pages 183-204, January.
  20. William Easterly & Ross Levine & David Roodman, 2004. "Aid, Policies, and Growth: Comment," American Economic Review, American Economic Association, American Economic Association, vol. 94(3), pages 774-780, June.
  21. James M. Poterba, 1999. "The Rate of Return to Corporate Capital and Factor Shares: New EstimatesUsing Revised National Income Accounts and Capital Stock Data," NBER Working Papers 6263, National Bureau of Economic Research, Inc.
  22. 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.
  23. David N. Weil & Oded Galor, 2000. "Population, Technology, and Growth: From Malthusian Stagnation to the Demographic Transition and Beyond," American Economic Review, American Economic Association, American Economic Association, vol. 90(4), pages 806-828, September.
  24. Francisco Rodriguez & Dani Rodrik, 1999. "Trade Policy and Economic Growth: A Skeptic's Guide to Cross-National Evidence," NBER Working Papers 7081, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Almuth Scholl, 2006. "Aid Effectiveness and Limited Enforceable Conditionality," 2006 Meeting Papers, Society for Economic Dynamics 292, Society for Economic Dynamics.
  2. Carl-Johan Dalgaard & Lennart Erickson, 2006. "Solow Versus Harrod-Domar," IMF Working Papers 06/284, International Monetary Fund.
  3. Larru, Jose Maria, 2006. "La ayuda al desarrollo: ¿reduce la pobreza?
    [Foreign Aid: reduce poverty? (in Spanish)]
    ," MPRA Paper 2341, University Library of Munich, Germany.

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