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Who Should Be Given More Foreign Aid?

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  • Wenli Cheng
  • Dingsheng Zhang

Abstract

This paper presents a simple model to investigate the effectiveness of foreign aid. It shows that foreign aid is most effective if it is given to a market economy with relatively high transaction efficiency. If transaction efficiency in a market economy is low due to, for instance, bad institutions or policies, then foreign aid will either be largely dissipated as transaction costs or can even lead to retrogression of market activities. In either case, it will be more effective to give foreign aid to poor primitive economies with no developed markets. Copyright 2008 The Authors. Journal compilation 2008 Blackwell Publishing Asia Pty Ltd

Suggested Citation

  • Wenli Cheng & Dingsheng Zhang, 2008. "Who Should Be Given More Foreign Aid?," Pacific Economic Review, Wiley Blackwell, vol. 13(5), pages 641-648, December.
  • Handle: RePEc:bla:pacecr:v:13:y:2008:i:5:p:641-648
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    References listed on IDEAS

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    1. Wen, Mei & King, Stephen P., 2004. "Push or pull? The relationship between development, trade and primary resource endowment," Journal of Economic Behavior & Organization, Elsevier, vol. 53(4), pages 569-591, April.
    2. Collier, Paul & Dollar, David, 2001. "Can the World Cut Poverty in Half? How Policy Reform and Effective Aid Can Meet International Development Goals," World Development, Elsevier, vol. 29(11), pages 1787-1802, November.
    3. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, vol. 40(2), pages 289-329, February.
    4. Collier, Paul & Dollar, David, 2002. "Aid allocation and poverty reduction," European Economic Review, Elsevier, vol. 46(8), pages 1475-1500, September.
    5. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April.
    6. Sachs, Jeffrey D. & Warner, Andrew M., 1999. "The big push, natural resource booms and growth," Journal of Development Economics, Elsevier, vol. 59(1), pages 43-76, June.
    7. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September.
    8. William Easterly, 2003. "Can Foreign Aid Buy Growth?," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 23-48, Summer.
    9. Paul Collier & David Dollar, 2004. "Development effectiveness: what have we learnt?," Economic Journal, Royal Economic Society, vol. 114(496), pages 244-271, June.
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