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Aid Volatility, Human Capital, and Growth

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  • Pierre-Richard Agénor

Abstract

This paper studies the effect of aid volatility on growth, in a model where the decision to invest in skills is endogenous. The analysis focuses on a low-income economy where the cost of acquiring education benefits from public subsidies, which are partly financed through foreign aid. Thus, aid plays a critical role in determining the distribution of skills across workers. By creating uncertainty about the net return to education, a high degree of aid volatility mitigates agents' incentives to invest in skills. If savings and growth depend on the composition of the labor force, and if more able workers are more productive, aid volatility may have an adverse effect on the mean growth rates of investment and output. Aid volatility may therefore contribute to the persistence of a stagnation equilibrium.

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  • Pierre-Richard Agénor, 2016. "Aid Volatility, Human Capital, and Growth," Centre for Growth and Business Cycle Research Discussion Paper Series 219, Economics, The University of Manchester.
    • Handle: RePEc:man:cgbcrp:219
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