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Aid volatility and poverty traps

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  • Agénor, Pierre-Richard
  • Aizenman, Joshua

Abstract

This paper studies the impact of aid volatility in a two-period model where production may occur with either a traditional or a modern technology. Public spending is productive and "time to build" requires expenditure in both periods for the modern technology to be used. The possibility of a poverty trap induced by high aid volatility is first examined in a benchmark case where taxation is absent. The analysis is then extended to account for self insurance (taking the form of a first-period contingency fund) financed through taxation. An increase in aid volatility is shown to raise the optimal contingency fund. But if future aid also depends on the size of the contingency fund (as a result of a moral hazard effect on donors' behavior), the optimal policy may entail no self insurance.

Suggested Citation

  • Agénor, Pierre-Richard & Aizenman, Joshua, 2010. "Aid volatility and poverty traps," Journal of Development Economics, Elsevier, vol. 91(1), pages 1-7, January.
  • Handle: RePEc:eee:deveco:v:91:y:2010:i:1:p:1-7
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    Cited by:

    1. Chatterjee, Santanu & Mursagulov, Azer, 2016. "Fiscal Policy And The Real Exchange Rate," Macroeconomic Dynamics, Cambridge University Press, vol. 20(07), pages 1742-1770, October.
    2. Kathavate, Jay, 2013. "Direct & Indirect Effects of Aid Volatility on Growth: Do Stronger Institutions Play a Role?," MPRA Paper 45187, University Library of Munich, Germany.
    3. World Bank, 2008. "Haiti : Public Expenditure Management and Financial Accountability Review," World Bank Publications, The World Bank, number 6469.
    4. Fernando Gabriel Im & David Rosenblatt, 2015. "Middle-Income Traps: A Conceptual and Empirical Survey," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 6(03), pages 1-39.
    5. Villegas, Laura & Smith, Vincent H. & Atwood, Joe & Belasco, Eric, 2. "Does Participation In Public Works Programs Encourage Fertilizer Use In Rural Ethiopia?," International Journal of Food and Agricultural Economics (IJFAEC), Alanya Alaaddin Keykubat University, Department of Economics and Finance, vol. 4(2).
    6. Pierre-Richard Agénor, 2017. "Caught In The Middle? The Economics Of Middle-Income Traps," Journal of Economic Surveys, Wiley Blackwell, vol. 31(3), pages 771-791, July.
    7. Dobronogov, Anton & Keutiben, Octave, 2014. "Containing volatility : windfall revenues for resource-rich low-income countries," Policy Research Working Paper Series 6956, The World Bank.
    8. Larru, Jose Maria, 2009. "A structural analysis of foreign aid to ten Mediterranean countries," MPRA Paper 17865, University Library of Munich, Germany.
    9. Agénor, Pierre-Richard & Canuto, Otaviano, 2015. "Middle-income growth traps," Research in Economics, Elsevier, vol. 69(4), pages 641-660.
    10. Chatterjee Santanu & Giuliano Paola & Kaya Ilker, 2012. "Where Has All the Money Gone? Foreign Aid and the Composition of Government Spending," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-36, August.
    11. Gaoussou Diarra, 2011. "Aid unpredictability and absorptive capacity: analyzing disbursement delays in Africa," Economics Bulletin, AccessEcon, vol. 31(1), pages 1004-1017.
    12. Hudson, John, 2015. "Consequences of Aid Volatility for Macroeconomic Management and Aid Effectiveness," World Development, Elsevier, vol. 69(C), pages 62-74.
    13. Pierre-Richard Agénor, 2016. "Aid Volatility, Human Capital, and Growth," Centre for Growth and Business Cycle Research Discussion Paper Series 219, Economics, The Univeristy of Manchester.
    14. Kodama, Masahiro, 2012. "Aid Unpredictability and Economic Growth," World Development, Elsevier, vol. 40(2), pages 266-272.
    15. Chen, Hong & Singh, Baljeet, 2016. "Official Development Assistance, Public Investment and Economic Growth in Asia and the Pacific," International Journal of Development and Conflict, Gokhale Institute of Politics and Economics, vol. 6(2), pages 73-96.
    16. Thi Hong Hanh Pham, 2015. "Income Inequality and Foreign Aid," Working Papers hal-01158240, HAL.
    17. Pierre-Richard AGENOR, 2016. "Caught in the Middle? The Economics of Middle-Income Traps," Working Papers P142, FERDI.

    More about this item

    Keywords

    Aid volatility Stagnation equilibrium Poverty traps;

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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