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Agglomeration and Aid

  • Steven Brakman
  • Harry Garretsen
  • Charles van Marrewijk

A key issue in development economics is the explanation of core-periphery patterns around the world. Combining this issue with that of analyzing unilateral transfers (e.g. foreign aid) points in the direction of the use of New Economic Geography (NEG) models which, so far, has not been done explicitly. This paper tries to fill this gap in the literature by studying the (possibly ‘catastrophic’) effects of aid around the so-called break-points and sustain-points in a NEG model. We also analyze the effects of a “bystander”, that is a country which is not directly involved in the transfer. In the traditional transfer literature a bystander is known to potentially cause transfer paradoxes. Our findings in this NEG setting are as follows. First, direct transfer paradoxes are not possible in a symmetric setting even if a bystander is present. Second, the effects of foreign aid depend on the level of economic integration between donor and recipient. Third, if the equilibrium from which aid is given is stable, aid only has atemporary effect (even if there is a bystander present). Fourth, if the donor is relatively large, not only the recipient but also the bystander benefits from foreign aid.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1750.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1750
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  1. Gianmarco I.P. Ottaviano & Frédéric Robert-Nicoud, 2006. "The 'genome' of NEG models with vertical linkages: a positive and normative synthesis," Journal of Economic Geography, Oxford University Press, vol. 6(2), pages 113-139, April.
  2. Steven Brakman & Harry Garretsen & Marc Schramm, 2005. "Putting New Economic Geography to the Test: Free-ness of Trade and Agglomeration in the EU Regions," CESifo Working Paper Series 1566, CESifo Group Munich.
  3. Sajal Lahiri & Pascalis Raimondos-Møller, 2004. "Donor Strategy under the Fungibility of Foreign Aid," Economics and Politics, Wiley Blackwell, vol. 16(2), pages 213-231, 07.
  4. Lahiri, Sajal & Raimondos-Moller, Pascalis & Wong, Kar-yiu & Woodland, Alan D., 2002. "Optimal foreign aid and tariffs," Journal of Development Economics, Elsevier, vol. 67(1), pages 79-99, February.
  5. Gale, David, 1974. "Exchange equilibrium and coalitions : An example," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 63-66, March.
  6. repec:cup:cbooks:9780521572149 is not listed on IDEAS
  7. Jones, Ronald W, 1985. "Income Effects and Paradoxes in the Theory of International Trade," Economic Journal, Royal Economic Society, vol. 95(378), pages 330-44, June.
  8. Djajic, Slobodan & Lahiri, Sajal & Raimondos-Moller, Pascalis, 1999. "Foreign Aid, Domestic Investment and Welfare," Economic Journal, Royal Economic Society, vol. 109(458), pages 698-707, October.
  9. Baldwin, Richard E., 2001. "Core-periphery model with forward-looking expectations," Regional Science and Urban Economics, Elsevier, vol. 31(1), pages 21-49, February.
  10. Chichilnisky, Graciela, 1980. "Basic goods, the effects of commodity transfers and the international economic order," Journal of Development Economics, Elsevier, vol. 7(4), pages 505-519, December.
  11. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
  12. Kemp, Murray C & Kojima, Shoichi, 1985. "Tied Aid and the Paradoxes of Donor-Enrichment and Recipient-Impoverishment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 721-29, October.
  13. Baldwin, Richard E & Forslid, Rikard, 2000. "The Core-Periphery Model and Endogenous Growth: Stabilizing and Destabilizing Integration," Economica, London School of Economics and Political Science, vol. 67(267), pages 307-24, August.
  14. Michael, Michael S & van Marrewijk, Charles, 1998. "Tied to Capital or Untied Foreign Aid?," Review of Development Economics, Wiley Blackwell, vol. 2(1), pages 61-75, February.
  15. Bhagwati, Jagdish N & Brecher, Richard A & Hatta, Tatsuo, 1983. "The Generalized Theory of Transfers and Welfare: Bilateral Transfers in a Multilateral World," American Economic Review, American Economic Association, vol. 73(4), pages 606-18, September.
  16. Masahisa Fujita & Paul Krugman & Anthony J. Venables, 2001. "The Spatial Economy: Cities, Regions, and International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262561476, June.
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