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THE EFFECTS OF FOREIGN AID ON THE CREATION AND DISTRIBUTION OF WEALTH Wenli Cheng, Dingsheng Zhang and Heng-Fu Zou

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  • Wenli Cheng
  • Dingsheng Zhang
  • Heng-Fu Zou

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.

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File URL: http://www.buseco.monash.edu.au/eco/research/papers/2006/1006foreignaidandincomedistribution.pdf
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Bibliographic Info

Paper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number 10/06.

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Length: 16 pages
Date of creation: 01 Jun 2006
Date of revision:
Handle: RePEc:mos:moswps:2006-10

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Keywords: foreign aid; overlapping-generations model; investment in education;

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  1. Mosley, Paul & Hudson, John & Horrell, Sara, 1987. "Aid, the Public Sector and the Market in Less Developed Countries," Economic Journal, Royal Economic Society, vol. 97(387), pages 616-41, September.
  2. Oded Galor & Omer Moav, 2004. "From Physical to Human Capital Accumulation: Inequality and the Process of Development," Review of Economic Studies, Wiley Blackwell, vol. 71(4), pages 1001-1026, October.
  3. Henrik Hansen & Finn Tarp, 2000. "Aid effectiveness disputed," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 375-398.
  4. Santanu Chatterjee & Stephen J. Turnovsky, 2005. "Financing Public Investment through Foreign Aid: Consequences for Economic Growth and Welfare," Review of International Economics, Wiley Blackwell, vol. 13(1), pages 20-44, 02.
  5. Gary S. Becker & Nigel Tomes, . "Human Capital and the Rise and Fall of Families," University of Chicago - Population Research Center 84-10, Chicago - Population Research Center.
  6. Liutang Gong & Heng-fu Zou, 2001. "Foreign Aid Reduces Labor Supply and Capital Accumulation," CEMA Working Papers 56, China Economics and Management Academy, Central University of Finance and Economics.
  7. Liutang Gong & Heng-fu Zou, 1999. "Foreign Aid Reduces Domestic Capital Accumulation and Increases Foreign Borrowing: A Theoretical Analysis," CEMA Working Papers 8, China Economics and Management Academy, Central University of Finance and Economics, revised Apr 2000.
  8. Galor, Oded & Tsiddon, Daniel, 1997. " The Distribution of Human Capital and Economic Growth," Journal of Economic Growth, Springer, vol. 2(1), pages 93-124, March.
  9. Michael Benarroch & James D. Gaisford, 2004. "Foreign Aid, Innovation, and Technology Transfer in a North-South Model with Learning-by-Doing," Review of Development Economics, Wiley Blackwell, vol. 8(3), pages 361-378, 08.
  10. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, vol. 40(2), pages 289-329, February.
  11. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 35-52, January.
  12. Slobodan Djajic, Sajal Lahiri and Pascalis Raimondos-Møller, . "Foreign aid, domestic investment and welfare," Economics Discussion Papers 463, University of Essex, Department of Economics.
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