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

  • Sobhee, Sanjeev K.
  • Nath, Shyam
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    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.

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    File URL: http://purl.umn.edu/50163
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    Article provided by Review of Applied Economics in its journal Review of Applied Economics.

    Volume (Year): 3 (2007)
    Issue (Month): 1-2 ()
    Pages:

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    Handle: RePEc:ags:reapec:50163
    Contact details of provider: Web page: http://www.lincoln.ac.nz/story11874.html

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    1. Trumbull, William N & Wall, Howard J, 1994. "Estimating Aid-Allocation Criteria with Panel Data," Economic Journal, Royal Economic Society, vol. 104(425), pages 876-82, July.
    2. 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.
    3. Maizels, Alfred & Nissanke, Machiko K., 1984. "Motivations for aid to developing countries," World Development, Elsevier, vol. 12(9), pages 879-900, September.
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