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Financing Public Investment through Foreign Aid: Consequences for Economic Growth and Welfare

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  • Santanu Chatterjee
  • Stephen J. Turnovsky

Abstract

The paper develops a theoretical framework for understanding the mechanism through which foreign aid affects macroeconomic performance. The authors find that the long‐run impact of an aid program and the nature of the transitional dynamics it generates depend crucially on (i) the elasticity of substitution in production, (ii) whether the aid flow is tied to investment activity or not, (iii) how the recipient government chooses to react to the flow of external assistance, and (iv) whether the aid program is permanent or temporary. Structural characteristics of the recipient are important in determining the extent to which external assistance can aid growth and welfare.

Suggested Citation

  • Santanu Chatterjee & Stephen J. Turnovsky, 2005. "Financing Public Investment through Foreign Aid: Consequences for Economic Growth and Welfare," Review of International Economics, Wiley Blackwell, vol. 13(1), pages 20-44, February.
    • Handle: RePEc:bla:reviec:v:13:y:2005:i:1:p:20-44
    DOI: 10.1111/j.1467-9396.2005.00490.x
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    References listed on IDEAS

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    1. Charles R. Hulten, 1996. "Infrastructure Capital and Economic Growth: How Well You Use It May Be More Important Than How Much You Have," NBER Working Papers 5847, National Bureau of Economic Research, Inc.
    2. Paul Wachtel, 1998. "Current Account Balances and External Debt in Transition Economies: Lesson for Central Asia," Working Papers 98-10, New York University, Leonard N. Stern School of Business, Department of Economics.
    3. Stephen J. Turnovsky & Santanu Chatterjee, 2004. "Tied Versus Untied Foreign Aid: Consequences for a Growing Economy," Computing in Economics and Finance 2004 8, Society for Computational Economics.
    4. Nouriel Roubini & Paul Wachtel, 1997. "Current Account Sustainability in Transition Economies," Working Papers 97-03, New York University, Leonard N. Stern School of Business, Department of Economics.
    5. Santanu Chatterjee & Stephen Turnovsky, 2004. "Tied Versus Untied Aid: Consequences For A Growing Economy," Royal Economic Society Annual Conference 2004 147, Royal Economic Society.
    6. Collier, Paul & Dehn, Jan, 2001. "Aid, shocks, and growth," Policy Research Working Paper Series 2688, The World Bank.
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