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Growth, Income Inequality and Aid Giving: Looking for an Aid-Kuznets Curve

Author

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  • Sobhee, Sanjeev K.
  • Nath, Shyam

Abstract

This paper contributes to the literature on foreign aid by exclusively explaining a donor’s motivation for foreign external assistance. The underlying framework focuses on recipients’ needs for foreign aid to address income inequality as and when growth occurs. A tax-subsidy policy is hypothesised in the manner advocated by optimal tax theory to effectively deal with inequity by minimizing the distortionary effects of income taxes. This framework is ultimately endogeneized in the recipient’s budget constraint, from which the donor derives the demand for foreign assistance. The outcome supports an inverted-U relationship between foreign aid and per capita income in the way postulated by the conventional Kuznets curve. Our postulate is empirically tested using a panel of 29 developing countries across a time span of 27 years; and from which the hypothesis of an ‘Aid-Kuznets’ curve could not be rejected.

Suggested Citation

  • Sobhee, Sanjeev K. & Nath, Shyam, 2007. "Growth, Income Inequality and Aid Giving: Looking for an Aid-Kuznets Curve," Review of Applied Economics, Review of Applied Economics, vol. 3(1-2).
  • Handle: RePEc:ags:reapec:50163
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    File URL: http://purl.umn.edu/50163
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    References listed on IDEAS

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    1. Maizels, Alfred & Nissanke, Machiko K., 1984. "Motivations for aid to developing countries," World Development, Elsevier, vol. 12(9), pages 879-900, September.
    2. Trumbull, William N & Wall, Howard J, 1994. "Estimating Aid-Allocation Criteria with Panel Data," Economic Journal, Royal Economic Society, vol. 104(425), pages 876-882, July.
    3. Llavador, Humberto G. & Roemer, John E., 2001. "An equal-opportunity approach to the allocation of international aid," Journal of Development Economics, Elsevier, vol. 64(1), pages 147-171, February.
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    Cited by:

    1. Kumar, Ronald Ravinesh, 2013. "Remittances and economic growth: A study of Guyana," Economic Systems, Elsevier, vol. 37(3), pages 462-472.
    2. Simplice Asongu, 2016. "Reinventing Foreign Aid For Inclusive And Sustainable Development: Kuznets, Piketty And The Great Policy Reversal," Journal of Economic Surveys, Wiley Blackwell, vol. 30(4), pages 736-755, September.
    3. Simplice Asongu, 2014. "Reinventing foreign aid for inclusive and sustainable development: a survey," Working Papers 14/033, African Governance and Development Institute..

    More about this item

    Keywords

    foreign aid; optimal taxation; fiscal policy; International Relations/Trade; F35; H21; E62;

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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