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Aid, Nontraded Goods, and the Transfer Paradox in Small Countries

  • Jeffrey B. Nugent
  • Makoto Yano

This paper constructs a model of the transfer paradox for a small open economy with nontraded goods. It demonstrates that increased production of nontraded goods can change their domestic price so as to offset the otherwise beneficial effect of aid and, under certain conditions, to create a transfer paradox even in a small country. The model is estimated with time-series data for 44 aid-dependent countries for the period 1970-90. The results support the model and show that the nontraded goods expansion effect is more likely to cause immiserization than Harry G. Johnson's (1967) tariff-distorting export-displacement effect.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.89.3.431
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 89 (1999)
Issue (Month): 3 (June)
Pages: 431-449

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Handle: RePEc:aea:aecrev:v:89:y:1999:i:3:p:431-449
Note: DOI: 10.1257/aer.89.3.431
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  1. Chichilnisky, Graciela, 1980. "Basic goods, the effects of commodity transfers and the international economic order," Journal of Development Economics, Elsevier, vol. 7(4), pages 505-519, December.
  2. Weisskopf, Thomas E, 1972. "An Econometric Test of Alternative Constraints on the Growth of Underdeveloped Countries," The Review of Economics and Statistics, MIT Press, vol. 54(1), pages 67-78, February.
  3. Papanek, Gustav F, 1972. "The Effect of Aid and other Resource Transfers on Savings and Growth in Less Developed Countries," Economic Journal, Royal Economic Society, vol. 82(327), pages 934-50, September.
  4. Corden, W Max & Neary, J Peter, 1982. "Booming Sector and De-Industrialisation in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 92(368), pages 825-48, December.
  5. Burgess, Robin & Stern, Nicholas, 1993. "Taxation and Development," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 762-830, June.
  6. 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.
  7. Corden, W M, 1984. "Booming Sector and Dutch Disease Economics: Survey and Consolidation," Oxford Economic Papers, Oxford University Press, vol. 36(3), pages 359-80, November.
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  9. Brecher, Richard A. & Bhagwati, Jagdish N., 1982. "Immiserizing transfers from abroad," Journal of International Economics, Elsevier, vol. 13(3-4), pages 353-364, November.
  10. Bertrand, T. J. & Flatters, F., 1971. "Tariffs, capital accumulation and immiserizing growth," Journal of International Economics, Elsevier, vol. 1(4), pages 453-460, November.
  11. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
  12. 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.
  13. Griffin, Keith, 1970. "Foreign Capital, Domestic Savings and Economic Development," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 32(2), pages 99-112, May.
  14. Yano, Makoto, 1983. "Welfare aspects of the transfer problem," Journal of International Economics, Elsevier, vol. 15(3-4), pages 277-289, November.
  15. Kemp, Murray C & Kojima, Shoichi, 1985. "Tied Aid and the Paradoxes of Donor-Enrichment and Recipient-Impoverishment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 721-29, October.
  16. Eaton, Jonathan, 1989. "Foreign public capital flows," Handbook of Development Economics, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 2, chapter 25, pages 1305-1386 Elsevier.
  17. Griffin, Keith B & Enos, J L, 1970. "Foreign Assistance: Objectives and Consequences," Economic Development and Cultural Change, University of Chicago Press, vol. 18(3), pages 313-27, April.
  18. Jones, Ronald W, 1985. "Income Effects and Paradoxes in the Theory of International Trade," Economic Journal, Royal Economic Society, vol. 95(378), pages 330-44, June.
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