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Effects of development aid (grants and loans) on the economic dynamics of the recipient country

Author

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  • Cuong LE-VAN
  • Ngoc Sang Pham
  • Thi Kim Cuong Pham

Abstract

This paper investigates the nexus between foreign aid (in both forms: grant andloan), poverty trap, and economic development in a recipient country by using a Solowmodel with two new ingredients: a development loan and a fixed cost in the production process. The presence of this fixed cost generates a poverty trap. We show thatforeign aid may help the country to escape from the poverty trap and converge to astable steady-state in the long run, but only if (i) the country’s characteristics, such assaving rate, initial capital, governance quality, and productivity are good enough, (ii)the fixed cost is relatively low, and (iii) loan rule is generous enough. We also showthat our model with foreign aid has room for endogenous cycles, unlike the standardSolow model.

Suggested Citation

  • Cuong LE-VAN & Ngoc Sang Pham & Thi Kim Cuong Pham, 2023. "Effects of development aid (grants and loans) on the economic dynamics of the recipient country," EconomiX Working Papers 2023-2, University of Paris Nanterre, EconomiX.
    • Handle: RePEc:drm:wpaper:2023-2
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    References listed on IDEAS

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    1. Ngoc-Sang Pham, 2023. "Some Lectures on Macroeconomics," Working Papers hal-04366349, HAL.

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    More about this item

    Keywords

    Development loan; economic dynamics; economic growth; foreign aid; grant; poverty trap;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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