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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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Author Info
Wenli Cheng
Dingsheng Zhang
Heng-Fu Zou

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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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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
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Handle: RePEc:mos:moswps:2006-10

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

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Find related papers by JEL classification:
F35 - International Economics - - International Finance - - - Foreign Aid
O19 - Economic Development, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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  1. Gong, Liutang & Zou, Heng-fu, 2001. "Foreign Aid Reduces Labor Supply and Capital Accumulation," Review of Development Economics, Blackwell Publishing, vol. 5(1), pages 105-18, February. [Downloadable!] (restricted)
  2. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Blackwell Publishing, vol. 60(1), pages 35-52, January. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. Oded Galor & Omer Moav, 2004. "From Physical to Human Capital Accumulation: Inequality and the Process of Development," Review of Economic Studies, Blackwell Publishing, vol. 71(4), pages 1001-1026, October. [Downloadable!] (restricted)
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  5. Henrik Hansen & Finn Tarp, 2000. "Aid effectiveness disputed," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 375-398.
  6. Santanu Chatterjee & Stephen J. Turnovsky, 2005. "Financing Public Investment through Foreign Aid: Consequences for Economic Growth and Welfare," Review of International Economics, Blackwell Publishing, vol. 13(1), pages 20-44, 02. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
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  8. Becker, Gary S & Tomes, Nigel, 1986. "Human Capital and the Rise and Fall of Families," Journal of Labor Economics, University of Chicago Press, vol. 4(3), pages S1-39, July. [Downloadable!] (restricted)
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  9. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, vol. 40(2), pages 289-329, February. [Downloadable!] (restricted)
  10. 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. [Downloadable!] (restricted)
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